Here’s what you need to know about setting up a trust for your life policy:
A trust is a simple legal arrangement that allows you (the settlor) to gift your life insurance policy to someone else (the beneficiary). It’s a great way to ensure that your life insurance is not considered to be a part of your estate when you die, so your beneficiaries won’t face the burden of inheritance tax on your life policy. For joint life policies, both of you must agree to place your policy in trust.
How do trusts work?
Setting up a trust means that you (the settlor) give your policy to the trustees who then legally own your policy and look after it for the benefit of your beneficiaries. You will still be responsible for paying the insurance premiums, but the trustees will be responsible for keeping the trust deed and any other documents safe. They make the claim on your policy and ensure that the money goes to your beneficiaries as you intended.
Depending on the type of trust you set up, it can provide lots of flexibility to change who will benefit and when, so that your changing circumstances – such as having more children or grandchildren – can be taken into account.
There are also inheritance tax benefits, because the value of your policy in the trust is not generally considered to be part of your estate when you die, leaving more for your beneficiaries.
Who’s involved in a trust?
There are three key roles in a trust:
Who can set one up?
Most life policies can be put into trust, so anyone who owns a policy can set one up.
Why is setting up a trust important?
If a policy is not placed in trust, the policy proceeds may not go to the people who you want to receive it.
Without a trust, for a joint policy, the policy proceeds will automatically be paid to the survivor.
However, for a single life policy not placed in trust, there could be a delay before your spouse or partner receives the policy money. This is because when you die, if your policy is not in trust your personal representatives will need to obtain probate so that they have the authority to deal with your estate. The policy money will then be distributed in accordance with your will, or the laws of intestacy if you have not made a will.
The worst case could be if you are not married, and have not made a will, your partner may not be legally entitled to the policy proceeds at all unless placed in trust. Your adviser can help you decide which trust may be the best trust for you.
You can also give your trustees a letter telling them how you would like the money shared out, which is called a letter of wishes.
Why should unmarried couples consider a trust?
If your policy is not in trust and you have not made a will, your partner may not be legally entitled to the policy money.
Therefore to try and gain access to the money your personal representatives will need to obtain probate so that they have the authority to deal with your estate.
However, you can usually only apply for probate (a grant of representation) to be the administrator of the estate if you’re the person’s next of kin, e.g. their spouse (or registered civil partner) or child. You can also apply if you’d separated from the person, but you were still married or in a registered civil partnership when they died.
Unfortunately, you can’t apply for a grant of representation if you’re the partner of the person but weren’t their husband, wife or registered civil partner when they died.
The policy money will then be distributed in accordance with your will, or the laws of intestacy if you have not made a will. This means there could be a delay before your spouse receives the policy money or where there are children involved it could be mean that some or all of the money goes to them in accordance with the laws of intestacy.
The worst case could be if you are not married or in a registered civil partnership and have not made a will, as your partner may not be legally entitled to the policy proceeds at all unless placed in trust. Your adviser can help you decide which trust may be the best trust for you.
Why should joint policy holders consider a trust?
If the policy had been placed in a trust, it would have been outside of the estate with clear instructions as to who John wanted to receive the money, depending on both Lisa and John’s joint decision up front, helping to avoid any future issues.
What are the main benefits of having a trust?
There are three key benefits to putting life policies in trust:
Are there disadvantages?
Once the trust has been created it cannot usually be cancelled before it has served its purpose and the policy cannot be cancelled without the permission of the trustees.
Do I need to the insurer if my trustees personal contact details change, such as they move home or change their name etc?
Yes, in order to ensure the insurer can pay the policy proceeds to your trustees quickly and easily, please remember to tell them of any changes to their personal contact details as soon as possible, so our records are up to date.
Usually, you’ll simply need to send them a letter confirming your policy number and their new details/address. For a change of name they would need to see the Marriage certificate or relevant change of name papers.
How do I set up a trust?
We can help you choose which trust could be right for you.
As the person setting up the trust, you are called the settlor (or donor for an absolute trust), and you need to complete a trust deed. There are three parties involved: you (the settlor), your beneficiaries, and your trustees. Your beneficiaries don’t have to do anything to set up the trust. Please remember, for joint life policies, you must BOTH agree for your policy to be placed in trust.
Trust can now mostly be created electronically at the point of application, without the need for physical signatures. If done after the plan or policy is in place this may require a paper copy to be completed, signed, and witnessed.
When does a trust end?
The trust will usually only end once the policy has ended and there is nothing left in the trust – this could be once a claim has been made and the trustees have distributed all of the insurance money to the beneficiaries. Or it could be if the length of time the policy was taken out for has ended and a claim has not been made.
Can I cancel the trust later?
Once the trust has been set up, it cannot usually be cancelled before it’s served its original purpose. This means it’s really important that you’re sure the trust is right for you before you complete it.
When can a trust be set up?
You can put your personal life insurance policy into trust when you take it out, or at any time after that. All that is required is that you own the policy. Sometimes people transfer ownership of their life insurance policies – for example by providing it as security for a loan, or to pay for a funeral where the policy has funeral cover – which may mean that a trust cannot be used. If you’re not sure that you own your policy, we can help you.
Who controls the trust?
The people you ask to be the trustees control the trust. They are the legal owners, and they are responsible for managing the trust. They look after the trust fund and following a claim on the policy will make arrangements for the payments to be made to the beneficiaries.
The settlor does not control the trust, though you are usually still responsible for paying the premiums on your policy. You’re automatically a trustee so you will have a role to play in making plans and managing the trust.
The beneficiaries do not control the trust, although in some circumstances they can force trustees to act, for example, with an absolute trust, if all the beneficiaries are over 18 years old and of sound mind, they can act together to give directions to the trustees.
Who pays the premiums on the life insurance policy?
The settlor (person giving away their life insurance) is responsible for paying the insurance premiums. If the policy is cancelled because payments lapse, the trust also comes to an end.
Who can cancel the policy?
The settlor cannot cancel the policy themselves, without the trustees permission and all of the trustees must be in agreement. However, if the settlor stops paying their premiums, the trustees can’t force them to pay and if nobody else pays the policy will usually lapse. If the policy lapses the trust will also come to an end.
What types of trusts are there?
The following are the main forms of trusts used with protection products:
What is an absolute trust?
These trusts are also known as bare or fixed trusts. They clearly define the beneficiaries and their share at outset.
The beneficiaries cannot be changed once the trust has been set up. For this reason, a discretionary trust is usually more appropriate, to allow for changes in circumstances.
The trustees hold the death benefit of the policy for the beneficiaries of the trust.
Why use an absolute trust?
If the only purpose of the policy is to provide funds for the chosen beneficiary(ies). For example, a disabled dependant.
The policy proceeds will not form part of the settlor’s estate and will be free from IHT, including entry, periodic and exit charges, should the trustees be holding the benefits for a prolonged period of time. For example, until a child reached an agreed age.
The benefits are paid to the beneficiaries quickly, provided there is a surviving trustee, as they’re not included in the settlor’s estate and probate is avoided.
What is a discretionary trust?
A Discretionary Trust gives the trustees discretion over when they pay the death benefit and to whom out of a range of possible beneficiaries.
The settlor does not retain an interest in the policy. This means that they cannot receive benefits from a death, terminal illness or critical illness claim.
Why use a discretionary trust?
You may want someone else such as your children to benefit from the policy on their life.
The trustee discretion allows for future changes, for example, to include future children or grandchildren.
The death benefits payable will not form part of your estate and will be free from IHT. The trust may be subject to entry, periodic and exit charges but as our protection policies are regular premium and have no surrender value, this is highly unlikely.
As above, the benefits are paid to the beneficiaries quickly if there is a surviving trustee.
What is a split trust?
Why use a split trust?
Who can be a beneficiary?
The beneficiary is any person or people that you would like to receive the money from a claim on your policy. You can choose to name specific people and how much they will receive in certain trusts i.e. an Absolute Trust. Or if you think your family circumstances may change in the future or want to leave your policy in the hands of someone you trust to share out your insurance money, you can choose a Discretionary Trust.
Can the beneficiaries be changed later?
Yes, but it depends on the type of trust you have.
Under a Discretionary Trust, your trustees have the flexibility to choose from a wide list of people and can decide when and how much each person will get from the insurance policy money you put in trust. You can help them decide by giving the trustees a letter of how you would like the money shared, this is called a ‘letter of wishes’.
However, it is not possible to change your beneficiaries if you set up, for example, an Absolute Trust.
What are trustees?
The trustees are people you appoint to be the legal owners of your policy. The trustees will inform the insurer of any claim and receive the insurance money and then pass it on to your beneficiaries. You will automatically be a trustee on your trust.
How many trustees should there be?
I’d usually suggest that a maximum of four but a minimum of three trustees however it’s up to you to decide how many trustees you want. You are automatically a trustee, and so is any other person named on your policy if your life insurance is a joint policy. You must appoint at least one other trustee, but you can choose more than that.
Do trustees have to be UK citizens, or live in the UK?
Your trustees need to be over 18, and it’s usually easier if they’re UK taxpayers who live in the UK. If you want non-UK trustees, you might want to consider taking specialist legal and tax advice on this.
Who should you pick to be a trustee?
Choosing who will be a trustee is an important decision and one that you should consider carefully. Many people choose a family member or friend, while some choose to appoint a professional trustee (such as a trust company) or a solicitor or an accountant. You can choose a mix of both. You should pick at least two trustees, and these should be people you trust to act in the best interests of your beneficiaries.
Can the trustees be changed later?
Yes, trustees can change for a number of reasons. A trustee may want to retire, and they can do this if all the trustees agree. To change a trustee, all the trustees must agree including the trustee being changed.
What if a trustee dies?
If a trustee dies, the remaining trustees can still carry on but a replacement may be needed.
What are the trustee’s main responsibilities?
The trustees take legal ownership of the trust fund. Where a protection insurance policy is the only thing in the trust, they will usually not have much to do until the time comes to make a claim. When making trust decisions they must agree with all of the other trustees and must act in the best interests of the beneficiaries. Trustees are not allowed to profit personally from their role as trustee.
How do the trustees make a claim?
To make a claim, the trustees will usually need:
They should then contact the insurer to start the claim process.
What are the main tax implications of using a trust?
The main tax which is affected when insurance protection policies are placed in trust is inheritance tax (IHT). Inheritance tax is usually payable on all of the assets that you own when you die-including your house and any life insurance policy pay-out.
You can reduce your potential IHT bill by using a trust for your life insurance policy. Once a policy is placed in trust, it will not usually form part of your estate. This means that the money which is subject to inheritance tax when you die may be less, thereby increasing the amount of money that your loved ones receive after your death.
Everybody has a nil rate band currently* £325,000, which means that IHT would not be payable, if your estate is worth less than this. In addition there are some exemptions which can help to reduce the value of the estate. If you are unsure of your IHT position, you may wish to take specialist advice.
*As at 1 June 2021
IMPORTANT POINTS TO NOTE
It’s important to understand that in some cases, the trust itself might have to pay tax. However in the majority of cases, there are unlikely to be significant tax considerations, before the life policy pays out and also after a claim, as long as the money is paid out of the trust immediately.
However tax considerations can become increasingly important if the money is held in trust for longer and you might wish to seek professional advice to help with this.
In particular if you have a Family and Personal Income Plan (FPIP) policy, which usually pays out a monthly amount after your death for the length of time you decided, the potential for tax within the trust is higher.
The different types of trust are treated differently for IHT purposes. Discretionary, Survivors Discretionary and Flexible trusts are all types of relevant property trusts (RPT) and are largely treated in the same way; Absolute trusts are treated differently.
If you need more information about tax, our technical guides provide some further detail, or you may wish to seek specialist advice.
At Finance North we do not make a charge for placing a life policy in Trust.
If you have any questions about this then please feel free to ring Mark on 0161 771 2050, or email him at [email protected]
If you are in any doubt as to whether the trust is suitable for your requirements, please consult an independent legal adviser, or about the possible tax liability, please contact your professional tax adviser.
If having read the above you would like Finance North to assist in placing your life insurance plan in trust, then please complete the following: