Your life insurance policy is an important asset and putting the policy in trust can help avoid paying inheritance tax and get the claim paid quicker.
What is trust?
A trust is a legal agreement that allows you to leave assets (like an insurance policy) to your friends, family, or other people you pick as your beneficiaries. A trust is managed by one or more trustees, which could be a family member, friend or legal professional. The trustees are responsible for the trust until it pays out to the beneficiaries, in this case upon your death. Trust can also be set up to pay for a specific event, for example, when a child reaches 18.
Putting life insurance in trust is generally referred to as ‘writing life insurance in trust’, which would remove the policy proceeds from your estate for inheritance tax.
How does putting life insurance in trust work?
The Settlor
You are the Settlor who will set up the trust. You will need to decide on the type of trust that would suit you. There are a few options you can choose from, the most common are:
Bare Trust (Absolute Trust) – an absolute trust is established to benefit specific, named beneficiaries who are entitled fully to the trust. The beneficiaries cannot be changed in the future. The beneficiaries are entitled to the trust without delay as soon as it’s payable.
Discretionary Trust – in a discretionary trust, the trustees have more power and discretion over the assets after your death. They can assign beneficiaries and income from the trust and would act in line with your intentions outlined in the letter of wishes.
Flexible Trust – flexible trusts are common with insurance policies and help trustees to vary the benefits through the ‘power of appointment’. There will be a ‘default’ beneficiary and trustees can add additional beneficiaries.
The Trustee
You will need to decide and appoint a trustee (or trustees). Trustees are the people responsible for managing your trust. You can appoint yourself as one of the trustees but we recommend there are more to take over in case of your death.
The Beneficiaries
The beneficiary is the person who will benefit from the trust. You can name the beneficiaries or choose beneficiaries from a specific category, for example, “my children”.
The terms of the trust are specified in the trust deed.
You as a Settlor will still need to pay the insurance premium.
Who can benefit from life insurance in trust?
Anyone you would like to benefit from the trust. This can be
- Anyone you name in the deed, your children, spouse, family member, or a friend
- A category of people, for example, “my children”
- A charity
If you set up an Absolute Trust, you will not be able to change the beneficiaries. In Discretionary Trust, the trustee can decide who would benefit from the trust.
The benefits of writing life insurance in trust
There are many reasons why putting an insurance policy in trust is a good idea.
- Control over assets – putting life insurance in the trust would allow you to have more control of how the money is used and who will inherit it. Setting life insurance in trust is especially important for unmarried (or not in a civil partnership) couples, who otherwise would not inherit the policy.
- Faster access to the claim – while in trust, the payout from the insurance policy will not be subject to probate and funds will be available quicker.
- Lower Inheritance Tax – writing an insurance policy in the trust would mean that the proceeds from the policy will be outside the estate for the inheritance tax. However, depending on the chosen trust, there might be a tax charge on each 10th
Life insurance in trust for unmarried partners
It is important for couples who are not married or not in a civil partnership to have a will. If there is no will, the partners will not inherit each other’s estate and have no claim on the insurance policy.
It is important to make sure your partner and children have legal and financial protection in place after you die. With life insurance in trust, you can ensure the claim is paid promptly, to the right people, with no inheritance tax payable.
Is there a cost to write insurance in trust?
No. There is no extra cost to write insurance in trust. You can do it at the time of setting up a life insurance policy or anytime thereafter. Contact your insurance provider for the right form or call us for more detailed advice.
