Advisers have been urged to put their clients' life policies in trust or risk facing claims from unhappy clients.
Writing a policy in trust can protect it from unwanted probate and tax charges. Although payments from life insurance policies don't incur income tax, they could still be hit with an inheritance tax charge if they are not in trust and are counted towards the estate.
Probate fees are set to rise after the Ministry of Justice (MoJ) decided in November to pursue a banded structure for those fees, prompting experts to warn now was a good time to reconsider the arrangement of a client's life cover.
Neil Liversidge, managing director of West Riding Personal Finance Solutions, warned advisers who don’t routinely write policies in trust could end up facing claims.
He told FTAdviser: "I’ve long been a fanatic for putting life cover in trust. Sadly the same can’t be said of all advisers.
"Some lawyers are feeling the pinch a bit these days. Don’t be surprised then if, when calculating the probate fee resulting from the failure to put a trust in place, they offer to run a claim against the adviser on a no-win no-fee basis for the excess. It’ll be a nice and easy little earner.
"With a typical Professional Indemnity Insurance excess of £2,500 for non-investment claims, protection advisers who’ve written large cases might want to revisit their back book and put trusts in place now."
He added: "Last November’s announcement by the MoJ that it would press ahead with a shift to a tier-based system for probate costs adds another reason why trusts should be pretty much a default recommendation.
"Whilst the revised fee scale is far less draconian than the original proposals which mooted a top-tier charge of £20,000, estates worth £2m or more will still face a charge of £6,000."
Rachael Griffin, tax and financial planning expert at Quilter, said: "My view is that all life cover should be placed in trust and the reason is, invariably, because a client’s intention is to pay an inheritance tax bill or to get money to a loved one as quickly as possible on their passing.
"The probate process, regardless of whether you end up with a fee or not, takes a period of time.
"The decision is not influenced by probate fees, but by the purpose of life cover. The MoJ’s move is just a prompt to advisers to revisit those clients that perhaps haven’t already signed up to putting the life cover or other assets in trust."
Alan Lakey, director at CIExpert, agreed more plans should be placed in trust.
He said historically some clients were put off the practice by the clunky process but mnow more insurers were bringing to market online trusts, which made for an easier process.
He said: "Relevant Life plans have to be within a trust so the use of these devices is becoming more popular.
"There is definitely an argument that advisers should revisit large cases as this provides another opportunity to assess whether the plan itself remains suitable.
"‘No win no fee’ firms are desperate to find alternative revenue sources now that PPI is drying up so this may prove to be an option for them.
"Given the unpredictability of the Fos there are many avenues for them to explore such as the re-broking of critical illness plan, selling level term to cover a repayment mortgage."
The Financial Ombudsman Service could not give the number of cases it had received with regards to this issue.
But a spokesperson said: "On a more general level, we don’t receive enough complaints involving this issue to be able to comment on the types of problems, trends and themes we see."
Research carried out by financial planning firm Quilter showed that 65 per cent of people thought trusts were a good way to safeguard wealth and 62 per cent of those that had set up a trust said it gave them peace of mind.
A further 60 per cent chose trusts because they could choose their beneficiaries.
Ms Griffin said: "With any change, whether it be legislative or this probate change, advisers should be looking at their book of business and at least contacting their clients about the potential impact of any change.
"The probate change, while it has appeared in the media, people won’t necessarily think about what it means for them until they are at a point when it is too late to do any planning.
"However, avoiding a probate charge shouldn’t be the only reason for an adviser and their client to do something, it depends on what is right at the time."
