The Benefit of Having Your Life Cover in Trust

When you think of trusts, by association one immediately thinks of murky financial deals, offshore tax havens, or the protection of wealth by the country’s financial elite. In reality, trusts are far more mundane and, when used correctly, can remove many of the financial and emotional aspects of a loved one passing away.

What are the main reasons people take out life assurance?

People take out life assurance for all manner of reasons. Often it will be to provide a lump sum, or perhaps an ongoing income, for their loved ones in the event of their death. This might be to meet the cost of repaying a mortgage or loan, or to provide a replacement income, or simply because they want to leave their beneficiaries more than they own. Quite often life assurance is a simple way of meeting a potential inheritance tax liability.

The benefits of life assurance being held in trust

Firstly, dealing with the emotional side, obtaining death certificates and probate can be lengthy affair. If the owner of the life assurance is also the life assured, the benefits of the policy will not be paid until the deceased’s estate has been administered. This often rather defeats the object of having life assurance in the first place. If the policy is in trust, however, there is no need to wait for probate and the benefits will be paid as soon as evidence of death has been obtained, particularly important for plans set up to meet an inheritance tax liability or pay for a funeral.

Trusts are also vital from an inheritance tax perspective. Imagine a married couple or civil partners with a joint estate of £1 million, the maximum they can leave to beneficiaries free of inheritance tax - provided they meet the hideously complex exemption for main residences. They also have a joint life, second death life assurance policy with a benefit of £500,000 which is not subject to trust. In the event of the last of them to die, their beneficiaries would only receive £300,000 from the life assurance policy, with the Treasury taking £200,000 in inheritance tax. This could be avoided by simply placing the policy in trust.

How do you get a life assurance help in trust?

If you have any life assurance policies which are not in trust, then it is usually as straightforward as requesting the trust deed from your provider to correct this. Sometimes you may need to engage with a solicitor to draft a deed if the provider cannot help.

When establishing the trust, you will need to appointment trustees, whose responsibility it is to distribute the policy proceeds on death. Naturally, it is best to ensure you appoint at least one other person you can trust, and someone who is likely to outlive you.

Depending on the type of trust, you may need to nominate beneficiaries. An ‘absolute trust’ can be established which is set up for specific named beneficiaries who cannot then be changed in the future. This has drawbacks because circumstances and people change but is ideal where you know exactly who you would want to benefit and cannot conceive of this changing.

The second type is a ‘discretionary’ trust, which has no named beneficiaries but rather, you nominate classes of beneficiary, for example ‘my children’. The trustees then have discretion to distribute the proceeds. In addition, the proceeds of a policy can remain in the trust without being paid to beneficiaries.

This is very useful if the beneficiaries are still minors, or a surviving partner does not need the capital. It could also be used to protect the capital in the event a potential beneficiary is undergoing divorce or bankruptcy for instance. A discretionary trust can have wider complications, particularly for older style plans with an investment element or where premiums are significant, and it is worth speaking to a financial adviser before proceeding.

For expert advice on insurance matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.

Combined life assurance and critical illness policies and trusts

Finally, if you happen to have a combined life assurance and critical illness policy then a little more care needs to be taken. The critical illness, which will pay out if you suffer from a pre- determined serious illness, is for your benefit and should not be subject to trust. The life assurance, which is for the benefit of others, should be subject to trust. A “split” trust should therefore be used in this instance.

Whilst trusts can be complex, where life assurance is concerned it is a complexity worth understanding and dealing with. Taking professional advice will ensure you can sleep safe in the knowledge that your life assurance is paid to your loved ones swiftly and without the Treasury taking their cut.

Nick Gwilliam Dip PFS, Founding Financial Adviser, Integrity365

Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.