The matter of trusts
Taking out a life insurance policy gives you valuable peace of mind: you know you’ve protected your family against financial hardship, should the worst happen.
But how can you make sure your policy will pay out quickly, to those who’ll need it most, if you died unexpectedly? The answer might be to write your policy in trust.
What is a ‘trust’?
A trust is a legal document that allows you to specify what will happen to your money after your death. If your life insurance policy is written in trust, any payout will go to the trustees you’ve chosen, who will then ensure the funds are distributed to the
people you’d like to benefit from the policy (the beneficiaries).
Why is a trust important?
Putting your life insurance policy in trust gives you control over who will benefit and helps them avoid Inheritance Tax (IHT). It also helps to ensure they receive the money quickly.
Control
According to reports, only 6% of life insurance policies in the UK are set up in trust. As a consequence, the payouts become subject to the delays caused by the processing of a Will and, where there is no Will, the complex laws of intestacy come into play. This could mean the benefits of the policy will form part of your estate, which may not go to the people of your choosing.
With your life insurance in trust, you can specify who you want the beneficiaries to be. This is especially important if you are unmarried or in a civil partnership.
Inheritance Tax
A life insurance policy that has been written in trust does not form part of your legal estate and is not subject to IHT. This allows the entire policy payout to pass to the people you intended to benefit from it. Even if your partner is the named beneficiary of your policy (and therefore the claims payout would be exempt from IHT under the current rules), it can still be worthwhile putting your cover in trust to speed up the policy payout.
Faster payment
Using a trust should help ensure that the money paid out from your life insurance can be paid to the people of your choice more quickly, rather than waiting for lengthy legal processes, such as probate. This can be a welcome relief for those left behind during what is likely to be a very stressful and emotional time.
Setting up a trust
Trusts are usually easy to set up, but it’s important to select the right type of trust and complete the documentation carefully.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate Trust Advice.
If you’re thinking of putting a life policy in trust, please talk to us first. We can tell you if it’s the right choice for you, which type of trust is most appropriate for your circumstance – and help you put the trust in place.
