A Guide to Wealth Protection: Protecting Your Family
Contents:
- Introduction
- Life Cover and Critical Illness Cover
- How Trusts Can Improve the Position with Life Policies
- Our Position
Introduction
“Look after the downside and the upside will take care of itself”
The very best money managers and investors have an obsession and focus on preservation and exceptional risk management of their positions. A trait which works right across the financial spectrum. How exactly can you go about managing your wealth and your money to;
- Reduce risks?
- Protect against running out of funds?
- Protect you from having an experience which rips your finances to pieces?
- Protect your wealth through the rest of your life?
- Protect your family bloodline interests?
Our aim is help you work out what the major risks are and, from there, how you can put in place plans to protect yourself. We look at how to protect a family against death or critical illness; how to keep your pension value intact; how to protect wealth against divorce in the family; how to protect monies in retirement; how to pay for care fees; how to protect your income and savings against inflation and tax rises.
We look at how all families and individuals can benefit from the use of trusts. We explore how and why such a simple mechanism – and solution to so many threats - is perceived as complex, when the reality is different. Every section of this guide is dedicated to providing ideas and information to help you protect your wealth and assets.
Protecting Your Family
Life Cover and Critical Illness Cover
Anyone looking to protect their family wealth should look closely at how they can put in place life assurance to ensure that money is paid to beneficiaries on their death. Life assurance costs are normally fairly modest and arranging a life policy relatively easy. There are two areas of life assurance planning which are particularly linked to family protection: paying off loans and covering taxes, especially Inheritance Tax. Many families in this current age have high debts. Many of those same families afford the cost of debt through one wage earner. If that wage earner dies and their income ceases, the loans/debt can then become unaffordable for the beneficiaries or dependents, devastating the family that remain. Putting in place life assurance to pay off debts is usually a sound position; creating a lump sum on death, over and above the debt, may well be crucial to keep a decent level of income available for the family. For those who have very large Estates, wealth measured in hundreds of thousands or more, Inheritance Tax (IHT) is a factor. There are many ways IHT can be alleviated, including through the use of trusts. However life assurance can be used as an alternative - to pay the expected IHT bill.
Many Estates have a property as the main asset, in this respect; life assurance cover can be useful to save the property from having to be sold to pay the tax. Separate to life cover, critical illness cover is a valuable part of wealth protection. Just as debts may cause problems on death, especially if income comes from one main source, so a critical illness can prove destructive to wealth. The possibility of an individual suffering a critical illness is many times higher than dying prior to retirement. This may seem an obvious point, but very few people in proportion have critical illness protection, despite its greater likelihood. The critical illness definition is important: at a top level critical illness policies cover such things as cancer, heart disease (including heart attacks), strokes and diseases such as MS and Motor Neuron Disease. The definitions can vary although they have become more streamlined in recent years. A critical illness plan can be put in place so that a lump sum pays out should an individual suffer one of the critical illnesses covered. This could be used to pay off debt, to cover loss of income or to provide for medical treatment to help the individual recover – all things that may keep wealth preserved.
How trusts can improve the position with life policies
Any policy which pays out a lump sum may present a problem.
Where is the money paid? What is the tax treatment?
Many people who wisely protect themselves against an untimely death or a critical illness, may do so neglecting to consider potential consequences. In this day and age of high divorce rates amongst families, unmarried couples and second marriages the simple question of where the lump sum eventually ‘ends up’ may be difficult to answer. If a lump sum is paid then there may be a question of whether it will be taxed. To some extent a well written Will could deal with some of this. However to properly protect the situation there is no better solution than a trust. Adding a trust to the life assurance policy allows the individual to provide a clear direction on where, how and when the money is paid out. A trust can also be used to take the lump sum away from any tax liability. There is no value paying for a policy if it pays out and then 40% is lost to the taxman. There may as well have been a smaller sum paid out if this was the case. If a policy is written under a trust it will mean it can pay out without any reference to Probate. This could mean two things: one, it can speed up the payout of the life assurance cover. Two, it could save costs. Trusts should always be used alongside life policies for these reasons. Yet most policies are set up without a trust in place.
LIFE ASSURANCE... FAMILY PROTECTION: CAN HELP TO PAY OFF LOANS & COVER TAXES
Our Position
We aim to ensure that all policies, wherever possible, have a trust alongside them to help direct where the lump sum should be payable. Existing policies that have been running for many years can have a trust added later. Putting a trust in place is one thing, making sure it is correctly worded and directed to the right beneficiaries and works from a tax efficiency point of view is another. We help our clients take care of all of this. Our professional advice is to cover 2 years’ worth of your income. Our experience shows that the worst illnesses can take up to 2 years to recover so that is what we recommend, however income protection can offset some of this cost – this again shows why advice is so important.
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Interface Financial Planning started providing independent financial advice in 1992. From the beginning it had the aim of providing professional advice and quality service to people with modest income and wealth. Its key value was putting people before profit, and contribution before reward. This mission statement has been our torch to light the path ahead and has been the reason that we have endured for over 24 years. Alan has lead the company with his personal values of: Integrity, Compassion, Respect, & Loyalty, and he is proud that over the years he has worked with clients who share similar values. Like him they want to help others and make the world a little better. Contact us.
Readers should not rely on, or take any action or steps, based on anything written in these guides without first taking appropriate advice. Interface Financial Planning Ltd cannot be held responsible for any decisions based on the wording in these guides where such advice has not been sought or taken.
The information contained in these guides is based on legislation as of the date of preparation and this may be subject to change. We will aim to keep them up to date but inevitably there may be a time delay so current legislation should always be checked.
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