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Life insurance and trusts
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In a life insurance trust, you transfer legal control of your policy to chosen trustees. When you pass away, your life insurance payout won’t be considered part of your estate. As a result, your beneficiaries might not have to pay as much inheritance tax, or any at all.
If your policy is held in trust, the life insurance lump sum may also not need ‘probate’. That is the process of proving the validity of a will, and who has the authority to administer your estate when you die.
Placing a policy in trust might also allow your loved ones to receive and distribute funds more quickly following a successful claim. That’s because even simple estates can take as long as a year to settle after someone has died.
What is a trust?
Trusts are legal arrangements where you name one or more trustees to manage your assets. When the time comes, they make sure that all funds reach your beneficiaries.
While a trustee can also be a beneficiary, it’s worth making sure there’s no conflict of interest that might result in distress for your family in future. You could also consider a non-beneficiary trustee.
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There are different life insurance trusts you can select from:
Absolute trust
Absolute trusts are usually fixed. This means once the trust is set up you’ll have limited or no ability to change beneficiaries or their shares.
Flexible trust
Flexible trusts make it possible to name numerous potential beneficiaries, but this list can be changed. For example, this might include adding new grandchildren.
Discretionary trust
A discretionary trust gives your trustees more decision-making power. It can be up to trustee discretion to decide how much your beneficiaries get. However, you can still leave a letter expressing your wishes as a guide to your trustees.
Survivor’s discretionary trust
A survivor’s discretionary trust is a form of joint life insurance in trust. Like a normal joint life insurance policy, it pays out to the surviving policy owner. In a joint trust, the surviving policy holder inherits your policy before any beneficiaries. If both policy holders die within 30 days of each other, the payout will go to any other named beneficiaries.
Split trust
In a split trust, you can hold both life insurance and critical illness cover in trust and then split them. Critical illness cover pays out when you’re diagnosed with a listed critical illness, unlike life insurance. This type of trust allows you to benefit from critical illness payments now, while the life insurance policy stays in place for your loved ones.
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There are several benefits to putting life insurance in trust.
- Express your wishes. You decide who receives what upon your passing and who oversees the process.
- Protections against inheritance tax. Life insurance policies can count towards your estate. If the total value of your estate plus the life insurance lump sum exceeds the inheritance tax threshold, your loved ones may need to pay 40% tax on the excess. With life insurance in trust, your policy does not count towards your allowance meaning your beneficiaries could stand to receive and keep more money in the event of a successful claim.
- Potentially faster access to funds. As life insurance written in a trust is exempt from inheritance tax, it could avoid going through probate. This may mean a faster payout for the people important to you, after they make a valid claim.
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While there are benefits to putting a life insurance policy into trust, there are also things to consider.
- It’s a full legal arrangement, which may not suit all. Putting life insurance in trust is a large commitment and some types of trusts don’t allow for any changes.
- Harder to make changes once in trust. Once the policy is in trust, you cannot remove it from the trust, so carefully consider your decision.
- It may invalidate a policy if changes are made incorrectly. If you feel like changes need to be made, speak to a legal expert to avoid invalidating your policy. By doing this, your loved ones won’t miss out on the benefits of a policy written in trust.
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When selecting who can be a trust beneficiary, you have complete control. Whether its friends or family or even an organisation. You can have multiple beneficiaries, helping you to support everyone you love in life.
Beneficiaries could be:
- Your partner or spouse.
- Children, grandchildren or stepchildren.
- Wider family members like cousins, aunts or uncles.
- Friends.
- An organisation or charity.
Let’s look at the details
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If you don’t have life insurance yet, you may be able to put your policy in trust when taking out a policy. If you have a current life insurance policy you want to put in trust, you should speak to a financial adviser or a solicitor. Bear in mind, you may need to pay for this service.
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Yes, you might like to consider a joint survivor’s discretionary trust. With this type of policy, the surviving policy holder will receive a payout before any other beneficiaries.
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When setting up a new life insurance policy directly into a trust, there should be no cost.
If you’ve got an existing policy, you should speak to a financial adviser or a solicitor first.
In either case, if you use a solicitor or financial adviser, there could be additional fees to pay.