What is life insurance in trust and why should I do it?

Have you ever heard about putting life insurance in trust, but aren’t sure exactly what it is and what the potential benefits are for you and your family, luckily for you its all explained in this blog post.

What is a trust?

It is a legal arrangement that states who you want to leave your assets to either on a specified date, such as a child’s 18^th birthday, or upon death. You can decide who you want your assets to go to, family, friends or whoever you pick as the beneficiary. It is managed by one or more trustees, which can be family members, friends or a legal professional.

A life insurance policy in put into a trust is usually referred to as “writing life insurance in trust”.

So, what are the benefits?

• Quicker access to the money – without placing the life insurance into a trust the would be beneficiaries upon death would need to obtain probate which would delay the realise of funds and potentially add financial strain at a very difficult time. With the life insurance in a trust your loved ones could receive the pay out in a matter of weeks of the death certificate.
• Protection of inheritance tax – by placing the life insurance into trust it is not considered part of your estate and thus not part of the inheritance tax calculation. However, there are exceptions to this and would always recommend financial advice in this matter.
• Control of how they are distributed – if you do not have a trust, your money might be used to clear outstanding debts and do not end up with your intended recipient. Setting up the trust allows you to decide who they go to and how they are used.

How does this all work?

1. Choose your trustees, this usually tends to be family members. Alternatively, you can choose a company such as a trust company or solicitors to act as trustees, but this would come at a fee.
2. Speak to your trustees to ensure that they are happy to accept the responsibility as they will be controlling the policy and the proceeds in the event of a claim on behalf of your recipients. To ensure prompt decision it is it advisable to limit the number of trustees to smaller size.
3. Decide which type of trust is right for you. Your options are:

1. Discretionary Trusts – your trustees have a high level of judgment about which recipients to pay when you’re no longer around, using your letter of wishes as a guide. Your letter of wishes outlines your intentions as to how trustees should administer the trust.
2. Survivor’s Discretionary Trust – this form of joint life insurance in trust pays out to the surviving partner in the policy; for example, if you die before your partner, they would be entitled to inherit your estate before your beneficiaries. If both policy owners die within 30 days of one another, your beneficiaries can benefit on the same basis as a Discretionary Trust.
3. Absolute Trust – in this scenario, the beneficiaries are named individuals who cannot be altered in the future. This includes any children born later and a spouse following a divorce. The benefit of an Absolute Trust is that the pay-outs can be made quickly without long legal delays, and as with other trusts, the Inheritance Tax is likely to be nil or negligible.

4. Upon completion, your trustees are now the legal guardians of the policy and must keep it safe. They can be stored with your solicitor, or a safe place if it is easy to find when you pass away. If the unfortunate happens it will be down to the trustees to claim from the insurance policy. Please note though as you are the settlor (creator of the trust) you must ensure all premiums are paid up to date.

How long does it last?

Depending on how you have sent the trust up, it could last up to a certain point within you life if you have stipulated that it changes upon a life event, for example past a certain birthday or upon a marriage. However, without these limitations it can run up to 125 years.

What’s the cost?  

With most providers there is not extra cost, it can simply be completed with an extra form upon policy start up, as long as you are the owner of the policy. It is recommended that you contact the life insurance provider or seek correct legal advice if you transfer the policy to another individual as this could cause implications to the trust.