Trusts

Trust

What is a trust?

A trust is a legal arrangement. It allows the owner of property (the settlor) to transfer legal, and/or beneficial, ownership of that property.

Why use a trust?

The reason for putting a life insurance policy into a trust include:

1. The settlor can direct who benefits and how – When a trust is set up, the settlor lists all the people they want to be able to share in the benefits payable under the life insurance policy. the is subject to the trust. The settlor can even indicate what proportion of the money they would like each individual to receive – for example James 25{641740ac2496db7e2f234c1d0778ad824ea788dc9d17e161ce11e9f945b32978}, John 25{641740ac2496db7e2f234c1d0778ad824ea788dc9d17e161ce11e9f945b32978} and Alison 50{641740ac2496db7e2f234c1d0778ad824ea788dc9d17e161ce11e9f945b32978}. Without a trust, the benefits payable under the policy would be payable to the settlor’s estate and he/she would need to leave directions under the terms of his/her Will to ensure the benefits pass to the people and in the manner intended.
2. Beneficiaries can receive benefits more quickly – If a life insurance policy is written in trust, it is no longer part of the settlor’s estate. So if they die, the trustee’s claim on the policy and the death benefits are paid directly to the trustees. If a life insurance policy is not written in trust, the benefits payable on death are payable to the settlor’s estate if they die during the policy term. This means a grant of probate, or letters of administration if the deceased had no Will, would be needed before the insurance company could pay out any money to the deceased’s personal representatives. This can take several months.
3. Asset Protection – If the life insurance policy is written in trust, the benefits payable under it may be protected from third party creditors or anyone with a claim on the settlor’s estate.
4. It can mitigate Inheritance Tax – If covers under a life insurance policy are written in trust, the value of the benefits payable under them are not included in the settlor’s estate for Inheritance Tax purposes when the settlor dies (as long as neither the settlor nor his estate or personal representatives are a beneficiary). There us therefore no Inheritance Tax to pay when the settlor dies in relation to any benefits held in the trust. However, if the money is kept in the trust past its tenth anniversary, some Inheritance Tax may be payable and a charge could arise when money leaves the trust.

Please note: Any benefits that are retained by the settlor and not gifted into trust may form part of the settlor’s estate for Inheritance Tax purpose (whether or not that benefit have been claimed). Before considering a trust, we recommend that you speak to a professional tax adviser who can look at your specific circumstances and explain how Inheritance Tax might affect you as well as any other tax considerations in putting a life insurance policy into trust.