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Probate fees false alarm: Unmarried couples represent the biggest life cover set-up risk

Tax trust and ISA news for Financial Advisers and Paraplanners

29 Apr 2019

Probate fees false alarm: Unmarried couples represent the biggest life cover set-up risk

We thought that this brilliant piece that first appeared in Cover Magazine was, with their permission worth sharing.

As the observant among you may have noticed, new fees to execute the will of the people, er, sorry, the will of a deceased person in England and Wales, have been delayed indefinitely. Among other things. The significantly increased rates were planned to come in on 1stApril. But again, the Government had us fooled, as there has been no time for parliament to agree on them being applied. Or not. 

As previously discussed in Cover, the intended fees caused waves on a number of fronts, including the suggestion of increased liability for advisers failing to take reasonable steps to protect life policies from probate. A fair point. And in reality, more often likely to bite than IHT. But for the vast majority of people, the amounts at stake are relatively small. Compared to the alarming (but rarely relevant) 40% on an excess of value above the tax free thresholds, it’s peanuts. With average sums assured still well under £200,000, most often in place with a mortgage, just £500 can be expected to be the most common penalty for having the death benefit inside the estate. 

No, the big worry is that the bereaved partner for whom the cover was intended gets nothing at all. A 100% loss of typically £150,000. Not because the claim is declined, but because the adviser didn’t ensure the policy was set up correctly. This is exactly what can happen to unmarried couples – and it’s heart-rending to see when it does. (No, the relatives don’t always play nicely and hand over the money anyway.)

We didn’t used to have to worry about this so much in the days when the most common practice was for couples to take out joint polices. Or if they took single life cover, at least most couples used to be married and intestacy rules saved them, or they might even have had a will. 

But now, for many good reasons, more life policies are set up as single life than joint - over 70%, of term policies going from iPipeline’s figures on the rising trend over 2013-2017. Which is a big problem for the growing number of unmarried couples who don’t realise how important it is to get this cover set up right. Apart from Guardian with their easy Payout Planner solution, this means there has to be a trust AND at least one trustee – hopefully the partner. 

The numbers showing the scale of this problem for unmarried couples can be found in the rest of the Cover article.

Ruth Gilbert of insuringchange.co.uk is the author

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Comments (2)

That is one trustee in addition to the life assured who will normally be a trustee but, if the policy is successfully claimed on will hardly be in a position to act.

There are, though, other problems such as "what if the partners split up?".

Do you then want scope to change the beneficiaries?

And if the trust proves to be wrong for some reason, who is liable?

Peter Turner   30/04/2019   11:31
Excellent underlining by Peter of the point that it's a trustee ADDITIONAL to the life assured that's important. Otherwise the trust falls into the administration of the estate. It is then at the mercy of the family as defined under intestacy rules obtaining probate, taking over the administration of the trust and possibly abusing the flexibility existing in most life policy trusts to appoint a different beneficiary to that intended - although abuse can be challenged in court.

Despite this angle, it's still best usually to have a trust allowing changes of beneficiary, as most life policy trusts do, to allow for changes of partner, amongst other things.

Obviously non-amicable splits where the departing partner is a trustee can be awkward, although there are ways round that - depending on trust powers to remove a trustee. Otherwise the same solution as for jointly taken policies exists - cancellation and replacement of cover. In this situation I'd expect most insurers to allow that on same terms for a single life case, but it would be interesting to know what is happening in practice - reinsurance arrangements and systems may get in the way.

As for who’s liable if the trust proves to be wrong for some reason, that does seem to be a worry expressed by some advisers, putting them off venturing that way altogether.

The answer will depend on why it’s wrong and whose fault it is. But as long as the providing insurer and adviser can show they have taken reasonable steps to keep the client and extra trustee on track (plus caveats on responsibility, pointing the client to take legal advice if in doubt, are often applied) the risk of liability is pretty low in practice. The risk must be much higher for doing nothing to prevent the cover being set up with no chance of going to the right person as the occurrence of these cases grows.

Given all these tricky bits, I’m impatient to see other insurers following in the footsteps of Guardian to deal with the problem in a much more straight-forward way, as Guardian have done with Payout Planner.

Ruth Gilbert   02/05/2019   18:29

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