Writing life insurance in trust
Writing life insurance in trust
Putting a life insurance policy into trust can help protect your pay-out from inheritance tax. Here’s what you should know if you’re considering it.
What’s a life insurance policy written in ‘trust’?
A life insurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. Your estate is your property, money and possessions. By ring-fencing the pay-out from a life insurance policy, by putting it in trust, you could protect it from inheritance tax. Plus, distributing a pay-out from this type of policy can be easier than with regular life cover. There are pros and cons of using a trust, which we’ll look into further in this article.
How does life cover written in trust work?
Your insurance provider, or a solicitor, can place your policy in trust for you. The proceeds of a trust are typically overseen by a trustee(s) who you appoint. These proceeds go to the people you’ve chosen, known as your beneficiaries. It’s the responsibility of the trustee(s) to make sure the money you’ve set aside goes to who you want it to, after you pass away.
You’ll need to think carefully about who you’d like to select as a trustee(s). As the name suggests, it ought to be people you really trust. A solicitor or a close family friend could be a good person to choose. Also, it’s sensible to choose someone who you think is likely to outlive you. Trust deeds, which set out the terms of a trust, will need to be agreed and signed by all parties involved.
What are the main types of life insurance trust?
The two main types of life insurance trust are called absolute and discretionary.
Absolute trusts tend to be fixed, meaning you can’t make many (and sometimes any) changes to the beneficiaries or their share of the trust once it’s set up.
Discretionary trusts tend to be more flexible. When you’re setting up a discretionary trust you don’t need to decide straight away who’ll benefit, what they will receive or when they will receive it. Also, you can usually add other trustees to a discretionary trusts once it’s been set up.
Why should I consider getting a policy in trust?
A policy is most commonly put in trust as a way to help avoid inheritance tax on life insurance pay-outs. While a standard life insurance pay-out is typically free from regular taxes, such as income tax, this sum could count towards the value of your estate. That means your beneficiaries could be liable to pay more inheritance tax on your estate. Assuming that you are liable to pay inheritance tax, the amount you have to pay depends on many factors, including whether you’re single or in a couple.
There are other benefits of placing a life insurance policy in trust:
- It doesn’t usually cost you anything extra – your insurance provider will often help you set up the trust, and many companies have templates on their websites that you can use
- Pay-outs can be quicker – any proceeds from the policy can be paid out without needing to wait for probate, which is the legal formalities of adding up and distributing your wealth and property.
You can also transfer some existing life insurance policies into trust, but in these cases you should speak to an independent legal advisor first.
What are the disadvantages of putting a life policy in trust?
One of the disadvantages of putting life insurance in trust is that it can be hard to make changes to a trust once it’s set up. Once you’ve put a policy in trust, it usually can’t be taken out of trust again. However there are times when you can amend a trust, but it can be risky. There have been instances when people have unknowingly invalidated their life insurance, after making changes to the policy in trust. Again, speak to a legal expert if you have any doubts about writing life insurance in trust.
There could also be tax implications if you move a life insurance policy into trust. Inheritance tax could be charged if, within seven years prior to dying, a policyholder changes the person who’s named as a beneficiary on a life policy held in trust. Inheritance tax would typically be due if the new beneficiary isn’t a spouse or civil partner.
Can a joint life policy be written in trust?
Joint life insurance covers two people’s lives, but pays out only once. Most commonly, this payment will be a lump sum that goes to the survivor after the first person dies within the term of a policy. If this happens the policy ends and the survivor has no further life cover.
It is possible to write a joint policy in trust, but this kind of policy is not usually taken out in this way. That’s because joint life insurance is often taken out by couples – and estates can typically be passed on to spouses or civil partners without being liable for inheritance tax.
What else should I consider when it comes to writing life insurance in trust?
There are other factors to take into account when it comes to putting a life insurance policy in trust. For more information, read our feature on how tax and life insurance works. If you’re still unclear about anything, it’s a good idea to speak to a specialist advisor.
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