ACCA Advanced Taxation (ATX) Practice Exam

What happens to a life assurance policy if the beneficiary is named in a trust?

1. It becomes part of the estate

2. It is ignored for IHT purposes

3. It is taxed as a gift

4. It is taxed differently than other policies

The correct answer is: It is ignored for IHT purposes

When a life assurance policy names a beneficiary who is a trust, it is generally treated as being outside the individual's estate for inheritance tax (IHT) purposes. This means that the payout from the policy will not be included in the deceased's estate when assessing IHT liabilities. Life assurance policies often have significant value, and this treatment is beneficial as it helps preserve wealth for the intended beneficiaries, ensuring that they receive the policy pay-out without the deduction of IHT. This is particularly relevant in estate planning, where individuals seek to mitigate tax liabilities for their heirs. The policy's funds will be directed to the trust rather than the estate, thus bypassing the potential for additional tax implications that would arise if it were part of the estate. This mechanism supports the intent of many individuals who wish to have their life assurance benefits allocated directly to their beneficiaries, retaining the wealth within the trust structure without incurring IHT. This outcome clarifies the importance of trust structures in life assurance policies, particularly in tax planning strategies aimed at protecting family wealth.