FINANCIAL GUIDE

A GUIDE TO

PROTECTION PLANNING
Do you have in place the right solutions to protect your assets and offer your family and business lasting benefits?

A guide to Protection Planning

Welcome
W
elcome to our Guide to Protection Planning. Providing all is going to plan, it can be immensely satisfying gradually building up assets and increasing your personal wealth. But as you know,

and when youre least expecting it, life will always deliver the occasional problem. Thats why we believe that the implementation of a robust wealth protection strategy is equally as important as a wealth creation strategy. Bad news can impact on any one of us at any time, so its important to have the correct protection strategy in place that will enable you to protect your familys lifestyle if your income suddenly changes due to premature death or illness. But choosing the right options can be difficult without obtaining professional advice to ensure you protect your family from financial hardship. This guide considers many of the different protection options and the structures into which you could transfer your assets, which will have lasting consequences for you and your family, and sets out why it is crucial that you make the correct choices. We can ensure that you find the right solutions to protect your assets and offer your family and business lasting benefits. Obtaining professional advice is essential to making an informed decision about the most suitable sum assured, premium, terms and payment provisions. We work with our clients to create tailored protection strategies that meet their financial goals and needs and were committed to ensuring that our clients enjoy the best financial planning service available. If you would like to discuss the range of protection services we offer, please contact us for further information.

This guide is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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Contents
02 04 06 09 10 12 14
Welcome
The most important financial decision you will ever make

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Financial protection for you and your family

With the abundance of choice, how will you make the right decisions?

Life assurance
Providing a financial safety net for your loved ones

Term assurance
You cant rely on always being there for those who depend on you

18 Making a Will
Providing peace of mind that your loved ones can cope financially without you

Whole-of-life assurance
Providing financial protection with cover that lasts for the rest of your life

21 Wealth protection
Without proper tax planning, could you end up leaving a huge tax liability?

Critical illness cover

Choosing the right cover can help ease your financial pressures

22 Trust arrangements
Do you have control over what happens to your estate, both immediately after your death and for generations to come?

Income protection insurance

How would you pay the bills if you were sick or injured and couldnt work?

25 Business protection
Dont overlook your most important assets, the people who drive your business

Long-term care funding

Greater clarity on how much care in old age may cost

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Glossary
A guide to the jargon of protection

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Life assurance
Providing a financial safety net for your loved ones
Whether youre looking to provide a financial safety net for your loved ones, moving house or a first time buyer looking to arrange your mortgage life insurance - or simply wanting to add some cover to what youve already got - youll want to make sure you choose the right type of cover. Thats why obtaining the right advice and knowing which products to choose including the most suitable sum assured, premium, terms and payment provisions is essential. Life assurance helps your dependants to cope financially in the event of your premature death. When you take out life assurance, you set the amount you want the policy to pay out should you die this is called the sum assured. Even if you consider that currently you have sufficient life assurance, youll probably need more later on if your circumstances change. If you dont update your policy as key events happen throughout your life, you may risk being seriously underinsured. As you reach different stages in your life, the need for protection will inevitably change. These are typical events when you should review your life assurance requirements: Buying your first home with a partner Having other debts and dependants Getting married or entering into a civil partnership Starting a family Becoming a stay-at-home parent Having more children Moving to a bigger property Salary increases Changing your job Reaching retirement Relying on someone else to support you Personal guarantee for business loans The other type of protection available is a whole-of-life assurance policy designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholders dependants with a lump sum, usually tax-free. Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die. Tax matters Although the proceeds from a life assurance policy are tax-free, they could form part of your estate and become liable to inheritance tax. The simple way to avoid inheritance tax on the proceeds is to place your policy into an appropriate trust, which enables any payout to be made directly to your dependants. Certain kinds of trust allow you to control what happens to your payout after death and this could speed up a payment. However, they cannot be used for life assurance policies that are assigned to (earmarked for) your mortgage lender. Generally speaking, the amount of life assurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to support your dependants for the required period of time. The first consideration is to clarify what you want the life assurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that. However, if you want to prevent your family from being financially disadvantaged by your premature death and provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider. What are your family expenses and how would they change if you died? How much would the family expenditure increase on requirements such as childcare if you were to die? How much would your family income drop if you were to die? How much cover do you receive from your employer or company pension scheme and for how long? What existing policies do you have already and how far do they go to meeting your needs? How long would your existing savings last? What state benefits are there that could provide extra support to meet your familys needs? How would the return of inflation to the economy affect the amount of your cover over time?

Your life assurance premiums will vary according to a number of different factors, including the sum assured and the length of your policy (its term), plus individual lifestyle factors such as your age, occupation, gender, state of health and whether or not you smoke. If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life assurance to replace at least some of your income. How much money a family needs will vary from household to household so, ultimately, its up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living. There are two basic types of life assurance, term and whole-oflife, but within those categories there are different variations. The cheapest, simplest form of life assurance is term assurance. It is straightforward protection, there is no investment element and it pays out a lump sum if you die within a specified period. There are several types of term assurance.

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Life assurance helps your dependants to cope financially in the event of your premature death. When you take out life assurance, you set the amount you want the policy to pay out should you die this is called the sum assured.

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Term assurance
You cant rely on always being there for those who depend on you
Its essential to have the right sort of life assurance in place. You cant rely on always being there for those who depend on you. There are various ways of providing for your family in the event of your premature death, but term assurance policies are the simplest and cheapest form of cover. The plans have no cash-in value or payments on survival as their design is limited to protecting your family. However, you could also use term assurance in relation to estate planning and for the payment of mortgages or other debts. Term assurance provides cover for a fixed term, with the sum assured payable only on death. You can choose how long youre covered for, for example, 10, 15 or 20 years (the term). Premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. Term assurance policies can be written on a single life, joint life (first or second death) or on a life-of-another basis. You must have a financial interest in the person that you are insuring when taking out any life-of-another policy and the provider may require proof of this before cover is given. There are several types of term assurance: Level term - this offers the same payout throughout the life of the policy, so your dependants would receive the same amount whether you died on the first day after taking the policy out or the day before it expired. This tends to be used in conjunction with an interest-only mortgage, where the debt has to be paid off only on the last day of the mortgage term. With level term assurance, premiums are fixed for the duration of the term and a payment will be made only if a death occurs during the period of cover. A level term assurance policy is taken out for a fixed term. This type of term assurance policy can also be useful for providing security to dependants up to a certain age. Decreasing term - the cash payout reduces by a fixed amount each year, ending up at zero by the end of the term. Because the level of cover falls during the term, your premiums on this type of policy are lower than on level policies. This cover is often bought to run alongside repayment mortgages, where the debt reduces during the mortgage term.This type of term assurance is less expensive than level term assurance. Increasing term - the potential payout increases by a small amount each year. This can be a useful way of protecting your initial sum assured during periods of rising inflation. Index-linked term - some insurers provide you with the option for the premium to be increased each year in relation to the Retail Price Index. Convertible term - you have the option to convert in the future to another type of life assurance, such as a whole-of-life or endowment policy, without having to submit any further medical evidence. This conversion option allows you to adapt your plan if your circumstances change. You can convert (usually within certain limits) part or all of your life assurance cover at any time during the term. And, importantly, you wont be asked any health questions at the date of conversion. If the level of cover you selected at the start remains the same, then the premiums will too. If you survive the policy term without any conversion of the plan, there will be no pay out. As this type of policy provides cover only in the event of death

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(plus the option to convert), there is no surrender value. So if you stop paying the premiums at any time, your cover would cease immediately and you would not receive any money back. Renewable term - some term assurances are renewable in that, on the expiry date, there is an option for you to take out a further term assurance at ordinary rates without providing evidence of your health status, as long as the expiry date is not beyond a set age, often 65. Each subsequent policy will have the same option, provided the expiry date is not beyond the limit set by the life office. Family income benefit - instead of paying a lump sum, this offers your dependants a regular income from the date of your premature death until the end of the policy term. This is one of the least expensive forms of cover and differs from most other types in that it is designed to pay the benefit as an income rather than a lump sum. In the event of a claim, income can be paid monthly, quarterly or annually and under current rules the income is tax-free. To ensure that income payments keep pace with inflation, you can usually have them increased as inflation rises. Its also possible to take a cash sum instead of the income option upon death. Family income benefit can also include critical illness cover, which is designed to pay the selected income if you are diagnosed with a critical illness within the chosen term. It is a fixed term and you wont be able to increase your cover or extend the term. If you become ill towards the end of the term (duration of your policy), you might not be able to obtain further cover.

Its essential to have the right sort of life assurance in place. You cant rely on always being there for those who depend on you.

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Whole-oflife assurance
Providing financial protection with cover that lasts for the rest of your life
Whole-of-life assurance policies provide financial security for people who depend on you financially. As the name suggests, whole-of-life assurance helps you protect your loved ones financially with cover that lasts for the rest of your life. This means the insurance company will have to pay out in almost every case and premiums are therefore higher than those charged on term assurance policies. There are different types of whole-of-life assurance policy some offer a set payout from the outset, others are linked to investments, and the payout will depend on performance. Investment-linked policies are either unit-linked policies, linked to funds, or with-profits policies, which offer bonuses. Whole-of-life assurance policies pay a lump sum to your estate when you die. This could be used by your family in whatever way suits them best, such as providing for an inheritance, paying for funeral costs and even forming part of an inheritance tax planning strategy. If the review reveals that the same level of protection cant continue, youll have two choices: Increase your payments Keep your payments the same and reduce your level of protection Maximum cover Maximum cover offers a high initial level of cover for a lower premium, until the first plan review, which is normally after ten years. The low premium is achieved because very little of your premium is kept back for investment, as most of it is used to pay for the life assurance. After a review you may have to increase your premiums significantly to keep the same level of cover, as this depends on how well the cash in the investment reserve (underlying fund) has performed. Standard cover This cover balances the level of life assurance with adequate investment to support the policy in later years. This maintains the original premium throughout the life of the policy. However, it relies on the value of units invested in the underlying fund growing at a certain level each year. Increased charges or poor performance of the fund could mean youll have to increase your monthly premium to keep the same level of cover.

Some whole-of-life assurance policies require that premiums are paid all the way up to your death. Others become paid-up at a certain age and waive premiums from that point onwards. Whole-of-life assurance policies can seem attractive because most (but not all) have an investment element and therefore a surrender value. If, however, you cancel the policy and cash it in, you will lose your cover. Where there is an investment element, your premiums are usually reviewed after ten years and then every five years. Whole-of-life assurance policies are also available without an investment element and with guaranteed or investment-linked premiums from some providers. Reviews The level of protection selected will normally be guaranteed for the first ten years, at which point it will be reviewed to see how much protection can be provided in the future. If the review shows that the same level of protection can be carried on, it will be guaranteed to the next review date.

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Critical illness cover

Choosing the right cover can help ease your financial pressures
You really need to find the right peace of mind when faced with the difficulty of dealing with a critical illness. Critical illness cover is a long-term insurance policy designed to pay you a tax-free lump sum on the diagnosis of certain specified life-threatening or debilitating (but not necessarily fatal) conditions, such as a heart attack, stroke, certain types/stages of cancer and multiple sclerosis. A more comprehensive policy will cover many more serious conditions, including loss of sight, permanent loss of hearing and a total and permanent disability that stops you from working. Some policies also provide cover against the loss of limbs. Its almost impossible to predict certain events that may occur within our lives, so taking out critical illness cover for you and your family, or if you run a business or company, offers protection when you may need it more than anything else. But not all conditions are necessarily covered, which is why you should always obtain professional advice. If you are single with no dependants, critical illness cover can be used to pay off your mortgage, which means that you would have fewer bills or a lump sum to use if you became very unwell. And if you are part of a couple, it can provide much-needed financial support at a time of emotional stress. The illnesses covered are specified in the policy along with any exclusions and limitations, which may differ between insurers. Critical illness policies usually only pay out once, so are not a replacement for income. Some policies offer combined life and critical illness cover. These pay out if you are diagnosed with a critical illness, or you die, whichever happens first. If you already have an existing critical illness policy, you might find that by replacing a policy you would lose some of the benefits if you have developed any illnesses since you took out the first policy. It is important to seek professional advice before considering replacing or switching your policy, as pre-existing conditions may not be covered under a new policy. Some policies allow you to increase your cover, particularly after lifestyle changes such as marriage, moving home or having children. If you cannot increase the cover under your existing policy, you could consider taking out a new policy just to top up your existing cover. A policy will provide cover only for conditions defined in the policy document. For a condition to be covered, your condition must meet the policy definition exactly. This can mean that some conditions, such as some forms of cancer, wont be covered if deemed insufficiently severe. Similarly, some conditions will not be covered if you suffer from them after reaching a certain age, for example, many policies will not cover Alzheimers disease if diagnosed after the age of 60. Very few policies will pay out as soon as you receive diagnosis of any of the conditions listed in the policy and most pay out only after a survival period, which is typically 28 days. This means that if you die within 28 days of meeting the definition of the critical illness given in the policy, the cover would not pay out. How much you pay for critical illness cover will depend on a range of factors including what sort of policy you have chosen, your age, the amount you want the policy to pay out and whether or not you smoke. Permanent, total disability is usually included in the policy. Some insurers define permanent total disability as being unable to work as you normally would as a result of sickness, while others see it as being unable to independently perform three or more Activities of Daily Living as a result of sickness or accident. Activities of daily living include: Bathing Dressing and undressing Eating Transferring from bed to chair and back again

The good news is that medical advances mean more people than ever are surviving conditions that might have killed earlier generations. Critical illness cover can provide cash to allow you to pursue a less stressful lifestyle while you recover from illness, or you can use it for any other purpose. Dont leave it to chance make sure youre fully covered.

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If you are single with no dependants, critical illness cover can be used to pay off your mortgage, which means that you would have fewer bills or a lump sum to use if you became very unwell.

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Income protection insurance

How would you pay the bills if you were sick or injured and couldnt work?
Protecting your income should be taken very seriously, given the limited government support available. How would you pay the bills if you were sick or injured and couldnt work? Income protection insurance, formerly known as permanent health insurance, is a financial safety net designed to help protect you, your family and your lifestyle in the event that you cannot work and cope financially due to an illness or accidental injury preventing you from working. Most of us need to work to pay the bills. Without a regular income, you may find it a struggle financially, even if you were ill for only a short period, and you could end up using your savings to pay the bills. In the event that you suffered from a serious illness, medical condition or accident, you could even find that you are never able to return to work. Few of us could cope financially if we were off work for more than six to nine months. Income protection insurance provides a tax-free monthly income for as long as required, up to retirement age, should you be unable to work due to long-term sickness or injury. By law, your employer must pay most employees statutory sick pay for up to 28 weeks. This will almost certainly be a lot less than your full earnings. Few employers pay for longer periods. If you find yourself in a situation where you are unable to return to work, your employer could even stop paying you altogether and terminate your employment. After that, you would probably have to rely on state benefits. Some employers arrange group income protection insurance for their employees, which can pay out an income after the statutory sick period. Income protection insurance aims to put you back to the position you were in before you were unable to work. It does not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost, less an adjustment for state benefits you can claim. This is usually translated into a maximum of 50 per cent to 65 per cent of your before-tax earnings. If you are self-employed, then no work is also likely to mean no income. However, depending on what you do, you may have income coming in from earlier work, even if you are ill for several months. The self-employed can take out individual policies rather than business ones, but you need to ascertain on what basis the insurer will pay out. A typical basis for payment is your pre-tax share of the gross profit, after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity. Some policies operate an average over the last three years, as they understand that self-employed people often have a fluctuating income. The cost of your cover will depend on your gender, occupation, age, state of health and whether or not you smoke. The occupation class is used by insurers to decide whether a policyholder is able to return to work. If a policy will pay out only if a policyholder is unable to work in any occupation, it might not pay benefits for long or indeed at all. The most comprehensive definitions are Own Occupation or Suited Occupation. Own Occupation means you can make a claim if you are unable to perform your own job; however, being covered under Any Occupation means that you have to be unable to perform any job, with equivalent earnings to the job you were doing before not taken into account. You can also usually choose for your cover to remain the same (level cover) or increase in line with inflation (inflationlinked cover): Level cover - with this cover, if you made a claim the monthly income would be fixed at the start of your plan and does not change in the future. You should remember that this means, if inflation eventually starts to rise, that the buying power of your monthly income payments may be reduced over time. Inflation-linked cover - with this cover, if you made a claim the monthly income would go up in line with the Retail Prices Index (RPI). When you take out cover, you usually have the choice of: Guaranteed premiums - the premiums remain the same all the way throughout the term of your plan. If you have chosen inflation-linked cover, your premiums and cover will automatically go up each year in line with RPI.

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Without a regular income, you may find it a struggle financially, even if you were ill for only a short period, and you could end up using your savings to pay the bills.

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Long-term care funding

Greater clarity on how much care in old age may cost
In his Budget speech delivered in March 2013, the Chancellor, Mr Osborne, said this was a Budget for an aspiration nation. He explained this meant helping those who want to keep their homes instead of having to sell it to pay for the costs of social care. The confirmation of a 72,000 cap on social care costs provides longterm savers with a greater idea of future spending, but doesnt cover additional costs incurred in a residential care home. the bill themselves. This means the majority of home owners will still find themselves in the uncertain position of not knowing how much their old age will cost. High care home fees People may be surprised that the social care cap does not cover their total care bill. This will result in many pensioners and elderly people having to prepare for high care home fees. Some may even find themselves in the unfortunate position of having to sell their assets to fund their old age. It is important for those who find themselves near or over the means-testing threshold to prepare for the financial burden that may be placed upon them to avoid undesired consequences. Will you be left to pick up the pieces? The future of social care is one of the most important issues facing the country. All too often the NHS and families are left to pick up the pieces when older people fail in their struggle to cope alone. If you are concerned about how this could impact on you or a family member, please contact us to review your requirements.

Cost of care Savers who were hoping that the Budget 2013 announcement around social care would provide greater clarity on how much their old age may cost them could be disappointed to find out that they will still have to foot the bill for uncapped hotel costs incurred in a care home, such as food and board. Means-testing limit Despite an increase in the means-testing limit covering total care costs (social care and hotel costs) to 118,000, many whose estate is worth more than the limit will have to pay for

The threshold up to which people are entitled to means-tested help with care costs raised from just over 23,000 to 118,000. The 72,000 ceiling does not include hotel costs such as food and accommodation.

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Financial protection for you and your family

With the abundance of choice, how will you make the right decisions?
With so many different protection options available, making the right decision to protect your personal and financial situation can seem overwhelming. There is a plethora of protection solutions which could help ensure that a lump sum, or a replacement income, becomes available to you in the event that it is needed. We can make sure that you are able to take the right decisions to deliver peace of mind for you and your family in the event of death, if you are too ill to work, require care or if you are diagnosed with a critical illness. All these protection options also apply to your spouse and to those who are in registered civil partnerships. Choosing the right mix of financial protection for your particular situation is essential to ensure that your specific requirements are fully covered.

Protecting your financial plan

Whole-of-life Provides a guaranteed lump sum paid to your estate in the event of your premature death. To avoid inheritance tax and probate delays, policies should be set up under an appropriate trust. Provides a lump sum for your beneficiaries in the event of your death over a specified term. You choose the sum insured and the policy term, which is guaranteed at the outset and remains unchanged throughout the term. Provides a replacement income for beneficiaries on your premature death. In the event of a claim, income can be paid monthly, quarterly or annually, and under current rules the income is tax-free. Decreasing term Provides a lump sum in the event of your premature death to cover a reducing liability for a fixed period, such as a repayment mortgage. Insurance that provides a percentage of your lost income caused by an illness, accident or disability. Rates vary according to the dangers associated with your occupation, age, state of health and gender. Insurance that provides a percentage of your lost income caused by an illness, accident or disability. Rates vary according to the dangers associated with your occupation, age, state of health and gender. Insurance that provides a percentage of your lost income caused by an illness, accident or disability. Rates vary according to the dangers associated with your occupation, age, state of health and gender.

Level term

Family income benefit

Critical illness

Income Protection

Long-term care

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Making a Will
Providing peace of mind that your loved ones can cope financially without you
A Will is an essential part of your financial planning. Not only does it set out your wishes, but, die without a Will, and your estate will generally be divided according to the rules of intestacy, which may not reflect your wishes. This can be particularly problematic for unmarried couples, as the surviving partner doesnt have any automatic rights to inherit, but it can also create problems for married couples and registered civil partners. Married partners or registered civil partners inherit under the rules of intestacy only if they are actually married or in a registered civil partnership at the time of death. So if you are divorced or if your civil partnership has been legally ended, you cant inherit under the rules of intestacy. But partners who separated informally can still inherit under the rules of intestacy. No one likes to think about it but death is the one certainty that we all face. Planning ahead can give you the peace of mind that your loved ones can cope financially without you and, at a difficult time, helps remove the stress that monetary worries can bring. Planning your finances in advance should help you to ensure that, when you die, everything you own goes where you want it to. Making a Will is the first step in ensuring that your estate is shared out exactly as you want it to be. If you leave everything to your spouse or registered civil partner therell be no inheritance tax to pay, because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else or to a family trust. Scottish law on inheritance differs from English law. you can decide how your assets are shared if you dont have a Will, the law says who gets what if youre an unmarried couple (whether or not its a same-sex relationship), you can make sure your partner is provided for if youre divorced, you can decide whether to leave anything to your former partner you can make sure you dont pay more inheritance tax than necessary Before you write a Will, its a good idea to think about what you want included in it. You should consider: how much money and what property and possessions you have who you want to benefit from your Will who should look after any children under 18 years of age who is going to sort out your estate and carry out your wishes after your death (your executor) Passing on your estate An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your Will. The courts can also appoint other people to be responsible for doing this job. Once youve made your Will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is. It is advisable to review your Will every five years and after any major change in your life, such as getting separated, married or divorced, having a child or moving house. Any change must be by codicil (an addition, amendment or supplement to a Will) or by making a new Will.

Good reasons to make a Will A Will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a Will:

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Effective inheritance tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate.
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Wealth protection
Without proper tax planning, could you end up leaving a huge tax liability?
In order to protect family and loved ones, it is essential to have provisions in place after youre gone. The easiest way to prevent unnecessary tax payments such as inheritance tax is to organise your tax affairs by obtaining professional advice and having a valid Will in place to ensure that your legacy does not involve just leaving a large inheritance tax bill for your loved ones. Effective inheritance tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, inheritance tax is the tax payable on your estate when you die if the value of your estate exceeds a certain amount. Its also sometimes payable on assets you may have given away during your lifetime, including property, possessions, money and investments. Inheritance tax is currently paid on amounts above 325,000 (650,000 for married couples and registered civil partnerships) for the current 2013/14 tax year, at a rate of 40 per cent. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the inheritance tax threshold, tax will be due on the balance at 40 per cent. Without proper planning, many people could end up leaving a substantial tax liability on their death, considerably reducing the value of the estate passing to their chosen beneficiaries. Your estate includes everything owned in your name, the share of anything owned jointly, gifts from which you keep back some benefit (such as a home given to a son or daughter but in which you still live) and assets held in some trusts from which you receive an income. Against this total value is set everything that you owed, such as any outstanding mortgages or loans, unpaid bills and costs incurred during your lifetime for which bills have not been received, as well as funeral expenses. Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called potentially exempt transfers and are useful for tax planning. Money put into a bare trust (a trust where the beneficiary is entitled to the trust fund at age 18) counts as a potentially exempt transfer, so it is possible to put money into a trust to prevent grandchildren, for example, from having access to it until they are 18. However, gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold are not subject to tax but amounts over this are taxed at 20 per cent, with a further 20 per cent payable if the person making the gift dies within seven years. Some cash gifts are exempt from tax regardless of the seven-year rule. Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as you still have sufficient income to maintain your standard of living. Any gifts between husbands and wives, or registered civil partners, are exempt from inheritance tax whether they were made while both partners were still alive or left to the survivor on the death of the first. Inheritance tax will be due eventually when the surviving spouse or registered civil partner dies if the value of their estate is more than the combined tax threshold, currently 650,000. If gifts are made that affect the liability to inheritance tax and the giver dies less than seven years later, a special relief known as taper relief may be available. The relief reduces the amount of tax payable on a gift. In most cases, inheritance tax must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Inheritance tax on some assets, including land and buildings, can be deferred and paid in instalments over ten years. However, if the asset is sold before all the instalments have been paid, the outstanding amount must be paid. The inheritance tax threshold in force at the time of death is used to calculate how much tax should be paid. Inheritance tax can be a complicated area with a variety of solutions available and, without proper tax planning, many people could end up leaving a huge tax liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. So without inheritance tax planning, your family could be faced with a large tax liability when you die. To ensure that your family benefits rather than the government, it pays to plan ahead. As with most financial planning, early consideration and planning is essential.

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Trust arrangements
Do you have control over what happens to your estate, both immediately after your death and for generations to come?
Following the changes introduced by the Finance Act 2006, trusts still remain an important estate planning mechanism. A trust arrangement can ensure that your wealth is properly managed and distributed after your death, so that it provides for the people who depend on you and is enjoyed by your heirs in the way you intend. A trust is often the best way to achieve flexibility in the way you pass on your wealth to future generations. You may decide to use a trust to pass assets to beneficiaries, particularly those who arent immediately able to look after their own affairs. If you do use a trust to give something away, this removes it from your estate provided you dont use it or get any benefit from it. But bear in mind that gifts into trust may be liable to inheritance tax. Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Used in conjunction with a Will, they can also help ensure that your assets are passed on in accordance with your wishes after you die. Here we take a look at the main types of UK family trust. When writing a Will, there are several kinds of trust that can be used to help minimise an inheritance tax liability. On 22 March 2006 the government changed some of the rules regarding trusts and introduced some transitional rules for trusts set up before this date. A trust might be created in various circumstances, for example: when someone is too young to handle their affairs when someone cant handle their affairs because theyre incapacitated to pass on money or property while youre still alive under the terms of a Will when someone dies without leaving a Will (England and Wales only) What is a trust? A trust is an obligation binding a person called a trustee to deal with property in a particular way for the benefit of one or more beneficiaries. Settlor The settlor creates the trust and puts property into it at the start, often adding more later. The settlor says in the trust deed how the trusts property and income should be used. Trustee Trustees are the legal owners of the trust property and must deal with it in the way set out in the trust deed. They also administer the trust. There can be one or more trustees. Beneficiary This is anyone who benefits from the property held in the trust. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlors family. Trust property This is the property (or capital) that is put into the trust by the settlor. It can be anything, including: land or buildings investments money antiques or other valuable property

The main types of private UK trust Bare trust In a bare trust, the property is held in the trustees name but the beneficiary can take actual possession of both the income and trust property whenever they want. The beneficiaries are named and cannot be changed.

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You can gift assets to a child via a bare trust while you are alive, which will be treated as a Potentially Exempt Transfer (PET) until the child reaches age 18 (the age of majority in England and Wales), when the child can legally demand his or her share of the trust fund from the trustees. All income arising within a bare trust in excess of 100 per annum will be treated as belonging to the parents (assuming that the gift was made by the parents). But providing the settlor survives seven years from the date of placing the assets in the trust, the assets can pass inheritance tax free to a child at age 18.

Transfers into interest in possession trusts after 22 March 2006 are taxable as follows: 20 per cent tax payable based on the amount gifted into the trust at the outset, which is in excess of the prevailing nil rate band Ten years after the trust was created, and on each subsequent ten-year anniversary, a periodic charge, currently 6 per cent, is applied to the portion of the trust assets that is in excess of the prevailing nil rate band The value of the available nil rate band on each ten-year anniversary may be reduced, for instance, by the initial amount of any new gifts put into the trust within seven years of its creation There is also an exit charge on any distribution of trust assets between each ten-year anniversary. Discretionary trust The trustees of a discretionary trust decide how much income or capital, if any, to pay to each of the beneficiaries but none has an automatic right to either.The trust can have a widely defined class of beneficiaries, typically the settlors extended family. Discretionary trusts are a useful way to pass on property while the settlor is still alive and allows the settlor to keep some control over it through the terms of the trust deed. Discretionary trusts are often used to gift assets to grandchildren, as the flexible nature of these trusts allows the settlor to wait and see how they turn out before making outright gifts. Discretionary trusts also allow for changes in circumstances, such as divorce, re-marriage and the arrival of children and stepchildren after the establishment of the trust. When any discretionary trust is wound up, an exit charge

Life interest or interest in possession trust In an interest in possession trust, the beneficiary has a legal right to all the trusts income (after tax and expenses) but not to the property of the trust. These trusts are typically used to leave income arising from a trust to a second surviving spouse for the rest of their life. On their death, the trust property reverts to other beneficiaries (known as the remaindermen), who are often the children from the first marriage. You can, for example, set up an interest in possession trust in your Will. You might then leave the income from the trust property to your spouse for life and the trust property itself to your children when your spouse dies. With a life interest trust, the trustees often have a power of appointment, which means they can appoint capital to the beneficiaries (who can be from within a widely defined class, such as the settlors extended family) when they see fit. Where an interest in possession trust was in existence before 22 March 2006, the underlying capital is treated as belonging to the beneficiary or beneficiaries for inheritance tax purposes, for example, it has to be included as part of their estate.

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is payable of up to 6 per cent of the value of the remaining assets in the trust, subject to the reliefs for business and agricultural property. Accumulation and maintenance trust An accumulation and maintenance trust is used to provide money to look after children during the age of minority. Any income that isnt spent is added to the trust property, all of which later passes to the children. In England and Wales the beneficiaries become entitled to the trust property when they reach the age of 18. At that point the trust turns into an interest in possession trust. The position is different in Scotland, as, once a beneficiary reaches the age of 16, they could require the trustees to hand over the trust property. Accumulation and maintenance trusts that were already established before 22 March 2006, and where the child is not entitled to access the trust property until an age up to 25, could be liable to an inheritance tax charge calculated as a percentage of the value of the trust assets. It has not been possible to create accumulation and maintenance trusts since 22 March 2006 for inheritance tax purposes. Instead, they are taxed for inheritance tax as discretionary trusts. Mixed trust A mixed trust may come about when one beneficiary of an accumulation and maintenance trust reaches 18 and others are still minors. Part of the trust then becomes an interest in possession trust. Trusts for vulnerable persons These are special trusts, often discretionary trusts, arranged for a beneficiary who is mentally or physically disabled. They do not suffer from the inheritance tax rules applicable to standard discretionary trusts and can be used without affecting entitlement to state benefits; however, strict rules apply. Tax on income from UK trusts Trusts are taxed as entities in their own right. The beneficiaries pay tax separately on income they receive from the trust at their usual tax rates, after allowances. Taxation of property settled on trusts How a particular type of trust is charged to tax will depend upon the nature of that trust and how it falls within the taxing legislation. For example, a charge to inheritance tax may arise when putting property into some trusts, and on other chargeable occasions for instance, when further property is added to the trust, on distributions of capital from the trust or on the tenyearly anniversary of the trust.

By using trusts, you have control over what happens to your estate, both immediately after your death and for generations to come. Placing assets in trust also ensures that they pass smoothly to your heirs without the delays, costs and publicity often associated with probate. Thats because the assets in a trust are legally owned by the trustees, not the settlor. Trusts are very complicated, and you may have to pay inheritance tax and/or capital gains tax when putting property into the trust. If you want to create a trust you should seek professional advice.

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Business protection
Dont overlook your most important assets, the people who drive your business
Every business has key people who are driving it forward. Many businesses recognise the need to insure their company property, equipment and fixed assets. However, they continually overlook their most important assets, the people who drive the business a key employee, director or shareholder. Key person insurance is designed to compensate a business for the financial loss brought about by the death or critical illness of a key employee, such as a company director. It can provide a valuable cash injection to the business to aid a potential loss of turnover and provide funds to replace the key person. Share and partnership protection provides an agreement between shareholding directors or partners in a business, supported by life assurance to ensure that there are sufficient funds for the survivor to purchase the shares. It is designed to ensure that the control of the business is retained by the remaining partners or directors but the value of the deceaseds interest in the business is passed to their chosen beneficiaries in the most taxefficient manner possible. If a shareholding director or partner were to die, the implications for your business could be very serious indeed. Not only would you lose their experience and expertise, but consider, too, what might happen to their shares. The shares might pass to someone who has no knowledge or interest in your business. Or you may discover that you cant afford to buy the shareholding. Its even possible that the person to whom the shares are passed then becomes a majority shareholder and so is in a position to sell the company. The shareholding directors or partners in a business enter into an agreement that does not create a legally binding obligation on either party to buy or sell the shares but rather gives both parties an option to buy or sell, i.e. the survivor has the option to buy the shares of the deceased shareholder and the executors of the deceased shareholder have the option to sell those shares. In either case it is the exercise of the option that creates a binding contract; there is no binding contract beforehand. This type of agreement is generally called a cross-option agreement or a double option agreement. These are essential areas for partnerships or directors of private limited companies to explore. Different forms of protection Key person insurance - compensates your business up to a pre-agreed limit for the loss or unavoidable absence of crucial personnel, including the owner-manager. It is especially appropriate if your business depends on a few employees. Critical illness cover - pays a sum of money to specific employees or the business owner in the event of a serious illness, such as a heart attack or stroke. Income protection insurance - protects individuals by paying their salaries while theyre unable to work. Private health insurance - funds private healthcare for specific employees. As well as being an extra benefit of employment, it could help them to return to work more quickly after an illness by paying for rehabilitation treatment.

Every business has key people who are driving it forward. Many businesses recognise the need to insure their company property, equipment and fixed assets.
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Glossary
A guide to the jargon of protection
Assured A person or persons who are insured under the terms of a protection policy. Convertible Term Assurance A term assurance plan that gives the owner the option to convert the policy to a whole-of-life contract or endowment, without the need for medical checks. Critical Illness Cover Critical illness cover is an insurance plan that pays out a guaranteed tax-free cash sum if youre diagnosed as suffering from a specified critical illness covered by the plan. There is no payment if you die. You can take out the plan on your own or with someone else. For joint policies the cash sum is normally payable only once, on the first claim. Decreasing Term Assurance A term assurance plan designed to reduce its cover each year, decreasing to nil at the end of term. Decreasing term assurance cover is most commonly used to cover a reducing debt or repayment mortgage. Deferred Period A period of delay prior to payment of benefits under a protection policy. Periods are normally 4, 13, 26 or 52 weeks the longer the period, the cheaper the premium. Family Income Benefit A term assurance policy that pays regular benefits on death to the end of the plan term. Guaranteed Premiums This means the premiums are guaranteed to remain the same for the duration of the plan, unless you increase the amount of cover via indexation. Income Protection This insurance provides you with a regular tax-free income if, by reason of sickness or accident, you are unable to work, resulting in a loss of earnings. Income protection is also known as permanent health insurance (PHI). Life Assured The person whose life is insured against death under the terms of a policy. Life Insurance An insurance plan that pays out a guaranteed cash sum if you die during the term of the plan. Some term assurance plans also pay out if you are diagnosed as suffering from a terminal illness. You can take out the plan on your own or with someone else. For joint life insurance policies the cash sum is normally payable only once, on the first claim. Long-term Care Insurance to cover the cost of caring for an individual who cannot perform a number of activities of daily living, such as dressing or washing. Joint Life Second Death A policy that will pay out only when the last survivor of a joint life policy dies. Key Person (Key Man) Insurance Insurance against the death or disability of a person who is vital to the profitability of a business. Level Term Assurance A life assurance policy that pays out a fixed sum on the death of the life assured within the plan term. No surrender value is accumulated. Indexation You can arrange for your insurance benefit and premiums to increase annually in line with inflation or at a fixed percentage. Premiums are normally increased in line with RPI (Retail Prices Index) or NAEI (National Average Earnings Index). Insurable Interest A legally recognised interest enabling a person to insure another. The insured must be financially worse off on the death of the life assured.

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Mortgage Protection Mortgage life assurance or repayment mortgage protection is an insurance plan to cover your whole repayment mortgage, or just part of it. The policy pays out a cash sum to meet the reducing liability of a repayment mortgage. You can take out the policy on your own or with someone else. For joint policies the cash sum is normally payable only once, on the first claim. Paid-up Plan A policy where contributions have ceased and any benefits accumulated are preserved. Permanent Health Insurance Cover that provides a regular income until retirement should you be unable to work due to illness or disability. Also known as Income Protection. Renewable Term Assurance An ordinary term assurance policy with the option to renew the plan at expiry without the need for further medical evidence. Reviewable Premiums Plans with reviewable premiums are usually cheaper initially; however, the premiums are reviewed regularly and can increase substantially. Surrender Value The value of a life policy if it is encashed before a claim due to death or maturity. Sum Assured The benefit payable under a life assurance policy. Term Assurance A life assurance policy that pays out a lump sum on the death of the life assured within the term of the plan. Terminal Illness Some life policies include this benefit free of charge and this means the life insurance benefit will be paid early if you suffer a terminal illness.

Total Permanent Disability Cover Also known as permanent health insurance or income protection and sometimes available as part of a life assurance policy, this pays out the benefit of a policy if you are unable to work due to illness or disability. Trusts Many insurance companies supply trust documents when arranging your policy. Placing your policy in an appropriate trust usually speeds up the payment of proceeds to your beneficiaries and may also assist with inheritance tax mitigation. Waiver of Premium If you are unable to work through illness or accident for a number of months, this option ensures that your cover continues without you having to pay the policy premiums. Whole-Of-Life Unlike term assurance, whole-of-life policies provide life assurance protection for the life of the assured individual(s). Cover may either be provided for a fixed sum assured on premium terms established at the outset or flexible terms which permit increases in cover once the policy is in force, within certain pre-set limits, to reflect changing personal circumstances.

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Content of the articles featured in A guide to Protection Planning is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. The pension and tax rules are subject to change by the government. Tax reliefs and State benefits referred to are those currently applying. Their value depends on your individual circumstances. The performance of the investment funds will have an impact on the amount of income you receive. If the investments perform poorly, the level of income may not be sustainable. Goldmine Media, Basepoint Innovation Centre, 110 Butterfield, Great Marlings, Luton, Bedfordshire LU2 8DL
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