TRUSTS
A trust allows you to set aside an asset to benefit a specified person or people (the beneficiaries).
Life insurance policies are such an asset, and putting a policy in to a trust can affect what happens to the payout from a policy in the event of your death.
Policies that are set up in trust can avoid the need for a grant of probate allowing the right people to get paid the right amount at the right time.
Faster Payouts: Placing a life insurance policy in trust can ensure that the proceeds are paid out quickly to the intended beneficiaries, bypassing the probate process. This can be particularly crucial in providing immediate financial support to your loved ones.
Inheritance Tax Efficiency: Placing a life insurance policy in trust can help mitigate potential inheritance tax liabilities. The payout is usually not considered part of the policyholder's estate, reducing the tax burden on the beneficiaries.
Control and Protection: By placing the policy in trust, the policyholder can stipulate how the proceeds should be distributed and managed, ensuring that the money is used according to their wishes and for the intended beneficiaries.
Creditor Protection: Placing a life insurance policy in trust can protect the policy proceeds from creditors, providing an added layer of security for the beneficiaries.
Privacy and Confidentiality: Trusts can offer a degree of privacy and confidentiality, keeping the details of the policy and its beneficiaries out of the public domain
Putting life insurance in trust
Writing life insurance in trust is one of the best ways to protect your family’s future in the event of your death. Your life insurance policy is a significant asset, and by putting life insurance in trust you can manage the way your beneficiaries receive their inheritance. Here, we take you through the benefits of life insurance trusts, how the process works, who’s involved and the other considerations.
What is a trust?
Trusts are a straightforward legal arrangement that let you leave assets to friends, relatives or whoever you pick to be your beneficiaries. A trust is managed by one or more trustees – family members, friends, or a legal professional – until the trust pays out to your beneficiaries, which can either happen upon your death, or on a specified date such as when a child turns 18.
Your life insurance policy can be put into a trust, which is often referred to as ‘writing life insurance in trust’. One of the main benefits of this approach is to ensure that the proceeds of your policy are generally not considered part of your estate.
How does putting life insurance in trust work?
Trusts involve the following participants:
Settlor - the person who puts assets into a trust
Trustee - the person who manages the trust
Beneficiary - the person who benefits from the trust
You begin by selecting your trustees, who generally tend to be family members for personal insurance arrangements, your spouse or sibling for example. Alternatively, you can choose a company such as a trust company or solicitors to act as trustees if you pay them a fee. You should speak to your trustees to ensure that they are happy to accept the responsibility of controlling the policy and the proceeds in the event of a claim on behalf of all beneficiaries. It may be wise to limit the number of trustees to three or four so that decisions about your policy can be made promptly.
Next, you will need to decide which type of trust is right for you. The selection below are the main types of trust we see when it comes to financial planning around life insurance and similar contracts. Your options are:
Discretionary Trusts: With this type, trustees possess significant discretion in choosing beneficiaries after your passing. Your letter of wishes acts as a guide, outlining your intentions for the trust's administration.
Survivor’s Discretionary Trust: This form of joint life insurance in trust directs payouts to the surviving policy owner. For instance, if you were to pass away before your partner, they would inherit your estate before other beneficiaries. If both policy owners pass away within 30 days of each other, beneficiaries can benefit as outlined in a Discretionary Trust.
Absolute Trust: In this scenario, beneficiaries are specific individuals whose identities cannot be altered in the future. This includes children born later or a spouse following a divorce. The advantage lies in swift payouts without prolonged legal delays, and, like other trusts, the Inheritance Tax is likely to be minimal or nil.
Flexible Trust: This trust features two types of beneficiaries. The default beneficiaries are entitled to any trust income, while discretionary beneficiaries receive capital or income only if trustees make specific appointments during the trust period. If no appointments occur by the end of the trust period, default beneficiaries receive all benefits.
Once your trust is established, your trustees legally own the policy and must safeguard the trust deed. They can either enlist a solicitor's help for document storage or secure it in a safe location at home. Trustees will eventually claim from your insurer upon your demise, so having the trust deed readily available is essential. As the settlor, you remain responsible for ensuring timely payment of life insurance premiums. Engaging a legal adviser can be beneficial to guarantee the precision of the legal wording in your trust agreement.
The benefits of writing life insurance in trust
Opting to place your life insurance in trust is a popular choice many individuals make. Here are some key advantages associated with a life insurance trust:
Control Over Your Assets: Without a trust, your financial resources may be exhausted trying to settle outstanding debts at an extremely difficult time. By placing your life insurance in trust, you control what happens after your death. This allows you to handpick your beneficiaries and trustees. Establishing a trust is particularly crucial if you are not married or in a civil partnership, as it ensures a seamless transfer of assets to your intended recipients.
Quicker Access to Funds: In the absence of a trust, beneficiaries would typically need to go through the probate process upon your demise, causing potential delays. With a trust in place, your loved ones can receive the inheritance within a few weeks of the issuance of the death certificate, providing a faster and more efficient means of accessing the funds.
Protection Against Inheritance Tax: Placing life insurance in trust shields the payout from being considered part of your estate. While certain exceptions exist, such as potential Inheritance Tax charges on the assets (trusts) value every ten years*, this strategy can significantly mitigate tax liabilities. Currently set at a standard rate of 40%, Inheritance Tax is imposed on the portion of your estate exceeding the £325,000 threshold (the NIL rate band).
* Its highly unlikely any tax will be liable for most individuals as the money will usually have left the trust before 10 years. That said here is the caveat to this area.
Discretionary trusts fall under the category of 'relevant property' trusts. As the assets within the trust are not considered part of the taxable estate of any of the beneficiaries, the trust itself becomes subject to Inheritance Tax (IHT) assessments every 10 years, referred to as the 'periodic' or 'principal' charge.
In essence, during each 10-year anniversary, the trust is taxed based on the value of its assets minus the available nil rate band. The applicable rate for the excess is 6%, calculated as 30% of the lifetime rate, presently set at 20%. If the value of the trust is below the nil rate band, no charge will be incurred.
How long does a trust last?
Technically, your trust can last up to 125 years – there is no expiry date for trusts set-up for charitable purposes – but ultimately, your trust agreement should last however long you deem necessary. Your personal circumstances may influence the length of time you stipulate; for example, the trust could last until a child grows up and marries.
How much does it cost to arrange a trust?
When advising and arranging your insurance, there is no added cost to putting life insurance in trust with us. You can put your personal life insurance policy in trust when you take it out, or at any time after that – you simply need to own the policy. You should note that if you transfer your life insurance policy to another individual, this may have implications for your trust so it’s best to contact us directly or seek legal advice.