Writing Life Insurance into Trust
you should put your life insurance into trust
When recommending a client follow this advice, it is very rare to not get asked: so what’s the benefit of writing life insurance into trust? Well, quite simply, doing so is one of the best and easiest ways of shielding a slice of your estate from Inheritance Tax (IHT) and thus safe guarding your wealth for the benefit of those who will ultimately benefit. Life insurance policies can make up a significant portion of your estate. By placing it in a trust, you can preserve it in its entirety and determine how and when your beneficiaries receive their inheritance.
A trust is an entity in its own right. Thus, the property it contains (for this purpose your life insurance) is not considered as part of your estate for IHT purposes.
So, What is a trust?
In simple terms, a trust is a set of binding obligations on trustees to deal with property (the trust fund) for the benefit of of a group of people (the beneficiaries, who can be relatives, friends, charities etc). N.B. a trustee can also be a beneficiary of the trust fund, but generally this is not encouraged in the interest of objectivity. The fund is both distinct and separate from property owned by either trustees or beneficiaries. A trust can be managed by one or more trustees, who can be family members, friends, a legal professional or a combination of all the above. It’s prudent to limit the number of trustees to two or three so decisions regarding the trust can be made without too much delay or acrimony.
Does Anyone Own a Trust
The concept of a trust can often be difficult to wrap one’s head around as no one actually owns one. Trusts are their own legal entity and are not capable of being owned like a house, car, jewellery, bank account etc (which can all be trust property). A trust is a bunch of rights and obligations which bind the trustees to act in accordance to the trust’s deed for the ultimate benefit of the beneficiaries. Trustees have a fiduciary duty towards beneficiaries and must deal with the trust property in the latter’s best interest.
what trusts can I use for my life insurance policy?
Deciding on the type of trust best suited to your needs is very important. Each trust type has its own tax treatment in terms of inheritance, income and capital gains tax. N.B. this post will not delve into the tax regimes.
Discretionary Trusts (DT) – with this type of trust, no beneficiary has an immediate right to income from or any part of the trust fund. Thus, when you have passed away, your trustees are left with a high level of discretion about which beneficiaries to appoint income or capital, how much they get and at what intervals. Moreover, your trustees will use your memorandum/letter of wishes as guidance to what you would have wanted to happen.
Survivor to Benefit Trust – this type of trust specifies that if the survivor of a joint life policy outlives the first to die by the survival period (generally around 30 days), the life insurance proceeds will be paid to them. However, if the survivor also dies before the end of the survival period, the life insurance proceeds will be added to a discretionary trust for the benefit of the trust beneficiaries;
Absolute Trust – in this scenario, the beneficiaries are named individuals (not a class of beneficiaries) who cannot be changed in the future (including any children born after the event and a spouse following a divorce) and who have an absolute right to benefit. This means the role of the trustees in this type of trust is merely administrative, with no decision making responsibilities as in a DT.
Once your trust is set up, your trustees legally own the policy and will make a claim to your insurer once you pass away.
The benefits of writing life insurance in trust
Here are some more reasons one should consider moving life insurance into trust:
Control over your assets – setting up a trust is especially important if you’re not married, in a civil partnership or perhaps part of a blended family, as otherwise, your assets may not transfer to the intended recipient;
Faster access to your money – without a trust, when someone dies, the payout from their policy is added to their general estate. The beneficiaries are then dependent on the speed of probate and the administrative capabilities of the estate’s executors. With a trust in place, beneficiaries receive their inheritance as and when you would have wanted.
Protect your beneficiaries from Inheritance Tax – writing life insurance in trust means the money paid out from your policy will not be considered part of your estate. However, the trust might be liable to periodic charges through its life, which must be taken into account.
How long does a trust last?
English law does not tolerate perpetual trusts unless that trust is for charitable purposes. As a result, all new trusts created after April 2010 are able to exist for a period not exceeding 125 years. A trust can come to an end anytime before that. For example, the trust could last until a beneficiary attains a specified age.
How Much does it cost to put life insurance into trust ?
Please consult your IFA or insurance provider.
CONTACT TWB
It is always important to review your circumstances as family life evolves and when cultural, political and tax legislation changes occur. Keep up to date with developments and seek expert advice from firms like TWB, but know that TWB is at the forefront of its profession.
Estate Planning is an integral part of our service. As well as minimising the effects of IHT, many families wish to ensure the preservation of their wealth through several generations by making provision for children, whilst also considering events such as divorce, bankruptcy and accounting for later-life care. We have written thousands of Wills and helped countless clients with IHT planning, Lasting Powers of Attorney (LPA) and much more.
Contact Jules Jack for more information: julesj@twb.org.uk - 020 8920 3360