Freeing people from the fear of uncertainty

Summary

Air crashes, acts of terrorism and other events causing mass fatalities are those which all to regularly propel 24 hour news coverage into the homes of your clients. The TV reporting of the incident changes quickly, and within a few days will disappear from the most public view. However, it is the family and close associates of the deceased who will be left to deal with the consequences of that loss long after 24 hour news has rolled on. 

From a practical point of view it is in the days immediately after a death where the work of the insurance company and the skill of the adviser are placed sharply in the spotlight. The impact of the tragedy at family level is obviously greater if a couple die in the same event, and hence  planning solutions benefit significantly from having that lens placed on them in advance rather than in retrospect.

Facts and analysis

A couple will typically have property in their own (sole) names and some which is jointly held. The individually held property will fall into the estate of the deceased on death, whereas the jointly held property will follow the legal agreement with which its held.

The jointly held property of a long standing couple will most likely be held on a “joint tenancy” basis, meaning that in the event of the death of one of them the survivor would automatically inherit as a consequence of that legal agreement. A good example of that in action would be the family home.

Alternatively the property may be held on a “Tenants in Common” basis meaning that on  the death of one of the couple their share in the property would be passed on via their estate.

In some cases though that is where the planning stops, and as a consequence the family of a deceased couple may have significant practical issues to deal with should both individuals die.

In Scotland the situation can be more complicated by the distinction between “heritable” and “moveable” property. Heritable property (more easily referred to as immoveable property) is effectively land and buildings. Moveable property is everything else. The family home is typically the deceased’s main asset and it falls into the category of Heritable property. Movable property can include the deceased’s furniture, car, money, or ordinary shares.

Irrespective of the residence of the deceased couple and the composition of their assets, undeniably the absence of a Will can cause practical difficulties and some significant stress to the surviving family in dealing with affairs post death.  The absence of a Will coupled with the  almost inevitable lack of  sufficient life cover provision on death can contrive to compound the situation the deceased’s’ relatives and dependents face.

Life cover can be a stand alone solution even in the absence of a Will. However, in recommending life cover to individuals irrespective of if they are being advised in isolation or as one of a couple, the destination of the policy money, should a claim occur, needs to be fully thought through.

In advising a couple about a jointly held policy life policy; its important to bear in mind that the life policy proceeds would pass to the survivor if one died or would form part of the estate of the second of them to die if they died at the same time. In cases where its not possible to determine who died first, both English and Scottish law direct that the younger is deemed to have survived the older.  The proceeds would be part of their taxable estate, could be liable to IHT, and would be distributed in accordance with that person’s Will (or intestacy).

Aside from the practical difficulties associated with the absence of a Will, the possibility that money and property may pass to someone that the policyholder would not have wished to benefit needs to be addressed. Further, before payment could be made by the life company, further formality proving the ownership of the executors / administrators (commonly called “Probate”) would be required.

Irrespective of the existence of a Will, a couple will often have practical need for Protection cover. This requirement could be for a number of (fairly obvious ?)  reasons such as to cover a mortgage, additional (non mortgage) borrowings, protecting the family, Inheritance Tax etc. The common denominator though would be a financial impact of the death of one of them.

The death of both in the same event may well have additional probably significant impacts which could be financial and practical. Declaring a Trust of the policy can help to address both of those.

Next steps

Considering a solution

The absence of a Will can be a problem, and in some cases the existence of a will can be almost as problematic if it hadn’t been updated to deal with changing circumstances. A trust of a life policy can help plan around the absence of a Will and potentially gives more accessible flexibility so enabling changing circumstances to be addressed.

Aviva’s Survivor Trust operates in conjunction with a Joint life 1st death protection policy. It is established with the intention of allowing the survivor of the two lives insured to benefit from the policy money should only one of them die. Should both die, the policy benefits would be held by the Trustees of the trust for the benefit of the children of the deceased policyholders.

Provided that Trustees are surviving at the time of the death of the two lives insured, then the policy money can be paid out without needing to await “Probate”.

In addition, the use of a trust allows the policy money to be ring fenced outside of the estate of either party to the contract. This would mean that there would be the possibility of faster and more focussed administration of the money within the trust by comparison to the potentially slower , more wide ranging considerations which could apply to administration within the estate of the last to die. Significantly, the policy money would be held within the trust and not part of the taxable estate for IHT purposes. 

Important information

This information has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2020.  It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice.  Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients.  You should always seek appropriate legal or other professional advice.