Take charge

Sunday, 01 December 2013
Rose Phelps advises solicitors to take a central role in planning clients’ life insurance and coordinating the professionals involved.

When it comes to advising on life insurance, many solicitors are nervous of giving anything more than the very broadest advice about why a client might want to consider it, and about the pros and cons of writing a policy in trust. After all, solicitors do not want to give, or be thought to be giving, financial advice. Many clients will not want to pay their solicitor to do more than go through the draft trust documentation with them, as supplied by the insurer, and rely on their financial advisor to do the rest.

This reluctance on both sides is understandable, given that arranging and advising on cover is generally the realm of the financial advisor working with the insurer, but the solicitor’s role in overseeing the arrangements and making sure that the legal technicalities are dealt with and recorded for future reference is invaluable. If the client and the financial advisor are encouraged to value the solicitor’s role in bringing everything together and tying up any loose ends, much worry and work, and sometimes a sizeable amount of inheritance tax, can be saved when the death occurs.

The solicitor’s role

To be a valid assignment of the policy to the trustees, not only does the assignment and trust documentation have to be complete but notice also has to be given to the insurers in accordance with the Law of Property Act 1925, s136, as it is a gift of a chose in action. Earlier provisions in the Policies of Assurance Act 1867 are now generally regarded as being an alternative to the requirements of s136, as the earlier Act is still on the statute book. It is in completing the deed fully and in giving notice to the insurers that the solicitor can offer particular help, as well as in advising on the effect of the various clauses of the deed of assignment and trust. Standard draft deeds supplied by insurers are often suitable, but they need to be explained to and considered by the client. It is often tempting for the client to fill in the empty boxes on the form without advice, little knowing what the implications are. This is particularly so when the client buys cover over the internet and fills in the suggested draft deed without taking either financial or legal advice.

Case study

Consider Mr and Mrs Prudent. While their daughters are in their teens, they take out a joint life insurance policy on a last survivor basis, with the aim of providing some money for the family on their deaths, not least to help with the inheritance tax that will arise after they both die. Everyone is convinced the policy has been written in trust; after all, that was the idea and they signed a deed of trust and assignment, sent it to the financial advisor and paid the monthly premiums. Sadly Mr and Mrs Prudent are both taken seriously ill a few years later; one dies, followed a few months later by the other. Their family solicitor, Careworn (who is also their executor and a trustee of the policy trust), is given the policy and notifies the insurers of the second death. He is taken aback to find the insurers say they know nothing about a trust of the policy. They claim never to have been given notice of the assignment of the policy by the Prudents. They demand a grant of probate and will pay only to the executor. Even more alarmingly, HMRC takes the same view, and says it has not been proved that the deed of trust and assignment was ever completed, or, if it was, that notice was given to the insurers.

How could this be? Careworn had filled in the trust deed when Mr and Mrs Prudent sent it to him, and he sent it back to them to sign, in the standard form supplied by the insurer when the policy was being taken out. He had a copy of the deed on his old file, albeit undated because he left the clients to date it when they signed it. Or maybe the financial advisor was going to date it. It is hard to remember now, and the clients had not actually asked him to do any more than be a trustee of the policy and fill in a few boxes on the form. He had not even charged them, as they were friends and it seemed so straightforward. They said the financial advisor would do the rest.

The financial advisor is traced and explains that when the policy was taken out he was a financial advisor at the clients’ bank. He had indeed arranged the policy with the insurers and thinks he remembers Mr Prudent returning the trust deed. He says he would certainly have sent it on to the insurers. Not long after the policy was taken out, the bank made him redundant and moved his former department from London to Leeds, losing most of their archived files in the process. He is sorry he can’t be of more help.

Careworn writes to the insurers again – surely they have a record of the deed of trust being sent to them, or of receiving notice of the assignment and a copy of it? They do not. They explain that they have a faultless system for recording these things and would definitely have noted it and acknowledged receipt to whoever sent it to them, had they ever received it. An impasse.

HMRC fails to be moved by the many arguments put to it by Careworn, and repeats that the only surviving copy of the deed available is undated and there is no evidence that the clients or the financial advisor ever completed the deed and gave notice of the assignment to the insurers. The policy proceeds are chargeable to inheritance tax at 40 per cent. Regardless of where any blame lies for the apparent failure to complete the whole exercise effectively, the family do not have the energy or the resources to pursue a negligence claim against anyone. They pay the tax. They remain unimpressed by the bank that advised their parents, by the insurers who issued the policy and by Careworn.

Offering a helping hand

This worry, extra work and tax bill could so easily have been avoided had one person in the process taken overall charge and recorded everything in a traceable way. After all, the issues around the life policy were only ever going to arise after Mr and Mrs Prudent had died and were not there to tell their side of the story. The financial advisor could have taken charge, and maybe he did, but his old employers have lost the file. The insurers can record only what they are sent by the financial advisor or the solicitor, and it is up to the trustees of the policy or the executor to prove that notice was given to them. The obvious person to keep copies of all relevant documents and letters and to do a final check to make sure all the technical requirements have been met would have been the solicitor, but the clients did not ask him to do this. A more active approach by him from the outset, explaining to the clients the value of his work in supervising the whole process and keeping a full record with their wills in the office safe, and charging them an appropriate fee for that work, would have saved the family both strain and money in the long run.

The solicitor could have made a diary note to check in a month or two that the formalities had all been completed and to chase up any loose ends. The clients could have been invited to store in the solicitors’ safe the life policy itself, the deed of trust and assignment or a complete certified copy, as well as the receipt from the insurers of the notice of the assignment, and their wills and any other important documents. With various professionals dealing with different parts of the arrangements, the solicitor who is asked to help with the draft deed of trust and assignment is in an ideal position to be the repository of final documentation, or at least a full set of copy documents and letters, further strengthening the bond between the firm and the clients. Even if not involved at the outset, a solicitor consulted about wills, estate planning or related matters in the future can ask to see existing documentation about any life policies, as it may not be too late to put right any undiscovered problems while the client is alive. If the financial advisor or the insurers have a complete record too, so much the better, but the onus will be on the trustees of the policy and/or the executor of the estate to prove the position to HMRC, and their first call is likely to be to the solicitor. Better to be thanked for being thorough and active than criticised for being passive, whether negligent or not.

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Rose Phelps

Rose Phelps TEP is a Consultant Solicitor at Keystone Law.

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