Your life insurance trust and how it works
Arranging a life insurance trust can be easy, but what exactly do you need it for?
When you take out a life insurance policy, you’ve made a conscious decision to protect your family’s financial future. Therefore, it’s often important to make sure that your loved ones have the maximum possible benefit available to them.
With that in mind, it may be worth putting your life insurance into a trust. This can help to protect your policy against inheritance tax and makes it easier for your wealth to be distributed amongst the people you wish to give it to.
Putting your life insurance policy into a trust isn’t always suitable for everyone, but it can have its advantages.
What is a life insurance trust?
Your life insurance trust is a document that allows you to set out who you would like your life insurance policy to go to. Your beneficiaries can be chosen by you and you decide what percentage of your assets they will receive.
The trust is managed by an appointed trustee. They are responsible for distributing your life insurance policy as you had intended. For example, this may be a spouse who may look after the payout until your children reach a certain age.
What are the benefits of a life insurance trust?
Control over where your money goes
One of the main benefits of writing a life insurance policy into a trust is that you have the freedom to choose who receives the money. You can allocate a percentage of your trust to the people you want to receive the money. It can help to protect your family in the event that you are no longer around.
Probate is the legal and financial process involved in dealing with the assets of a person who has passed away. If a spouse is named in a will, they have to apply for probate before they can claim any of their partner’s assets. This involves a long process of identifying all assets, inheritance tax, settling liabilities and preparing documentation. This can be a lengthy process, especially if there is no will in place.
With a life insurance policy written in a trust, there is no need for probate. Your beneficiaries will receive the money a lot quicker and not have to go through a lengthy process.
Sidestep inheritance tax
Writing your insurance policy in a trust can also help to sidestep an inheritance tax bill. Anything that falls into the estate over £325,000 is subject to a 40% tax bill including property. Therefore, adding a life insurance policy to your assets can take most people over the threshold.
By writing your policy into a trust, it does not count towards the assets within your estate. Therefore, it is exempt from life insurance. It can be used to bump up the amount your family will receive or can be used to counteract a hefty inheritance tax bill.
How easy is it to set up a life insurance trust?
It’s fairly straight-forward to set up a life insurance trust. When you’re applying for your life insurance policy, you can set it up in a trust at the same time. All you need to do is choose your beneficiaries, appoint a trustee and sign the document.
Some providers such as Legal and General allow you to apply for a life insurance trust online without the need for a signature which can help to speed up the process further and remove the need for paperwork.
At Business Cover Expert, our dedicated team provide a free service to help write your policy into a trust and protect your life insurance policy.
What are the downsides?
Essentially, there are no downsides to writing your life insurance policy into a trust. However, it is important to be aware that trusts are fairly inflexible. Changes are allowed in the trust, but only if the policy number remains the same. If there is a new policy being written, then it cancels the trust and you’ll need to create a new one.
What is a trustee?
The trustee is the legal owner of the life insurance trust. In the event of a claim, they administer the life insurance payout and make sure that it is distributed as you intended it to be. They must administer the life insurance trust in accordance with the terms of the document.
It is important to choose the right trustee as they will manage your life insurance policy. Typically, people choose a trusted friend, family member or a professional advisor. You can appoint more than one trustee, and a trustee can be removed further down the line as long as the policy has a continuing trustee.
A non-discretionary trust is the simplest form of life insurance trust. Once the trust is written, it cannot be changed. The trustee(s) and the beneficiaries are chosen and how much you want your beneficiaries to receive. Even if you wish to add more beneficiaries further down the line, this is not possible.
A discretionary trust is used when you want to choose a certain time for beneficiaries to receive the money. For example, in a non-discretionary trust, all beneficiaries are paid once they reach 18. With a discretionary trust, it is up to the trustee to retain the life insurance payout until they believe it is the right time. The trustee can also choose who will benefit and how much they will receive based on your recommendations called an ‘Expression of Wishes’. This is not legally binding, but it can help to guide them towards your intentions.
The benefit of a discretionary trust is that beneficiaries can be added and removed, which can be useful if you have more children or grandchildren further down the line. However, it does mean that you are leaving the responsibility to your trustee so choosing the right trustee is extremely important.
A life insurance trust is easy to set up and can be done by your insurance provider. It’s worth doing for most people to protect their policy and ensure that their family receive the money as they intended without paying a hefty tax bill.
For more information about your life insurance trust and whether you should consider one, contact us today for more advice.