Benefits of Putting Life Insurance in Trust

The use of ‘trusts’ started over 1,000 years ago when monks took vows of poverty and their wealth was then held in trust to be used for the benefit of many.

• Settlor:  Person(s) making the monetary gift.
• Trustee:  Person(s) or company/organisation holding and managing the wealth in accordance with the trust rules and for the benefit of the beneficiaries.
• Beneficiary: Person(s) that will receive or benefit from the wealth from the trust.

Life Insurance Benefit in Trust

This is not complex, and most life insurance providers will have a standard trust deed/document.  The trust deed will include what should happen to wealth inside the trust as well as naming the settlor(s), the trustee(s) and beneficiaries.  It is usually a simple 1-page document unless a more complex trust with multiple rules is required.

The settlor starts a life insurance policy (term assurance or whole of life assurance), complete a simple trust deed, pay the premiums and on death, the sum assured is held by the trustees and paid out to the beneficiaries with the sum assured not forming part of the deceased’s estate, so it is paid directly to the beneficiaries.

Types of Trust

• Discretionary Trust – benefits are paid out at the discretion of the trustees.  The settlor will have set basic rules but it then up to the trustees to decide who benefits are paid to.
• Flexible Trust – Settlor names the squad of beneficiaries e.g.  The Smith Family  (just a like a football manager) and then the settlor (football manager) names the team to play (the beneficiaries) that can be changed or substituted with another squad member.
• Absolute Trust (or Bare Trust) – originating from the Married Women's Property Act 1882 which changed English law regarding the property rights of married women to own and control property in their own right absolutely.  This is the same for an absolute trust – the settlor names the beneficiaries and once set up, they cannot be changed meaning you have ensured your life insurance policy sum assured will be paid to exactly who you want it to, and it cannot be changed.  This is perhaps the most popular trust wording for life insurance and life insurance investment bonds given its simplicity and ease of administration.

Please note that if you have a whole of life assurance or term assurance with critical illness included, you can usually have the above trusts but worded as a ‘split trust’ where on death, the sum assured is paid to the beneficiaries but on diagnosis or a serious illness, e.g., cancer, the sum assured is paid out to the settlor i.e., the person who set up the policy (as they have not died).

HMRC Trust Registration

Provided there is no investment element, the trust will usually not need to register with HMRC.  If there is an investment element inside the policy e.g., a unit linked whole of life policy in trust, will need to be registered with HMRC’s Trust Register.

Pros and Cons of Life Insurance in Trust

• Life insurance sum assured is paid direct to beneficiaries and usually outside the deceased’s estate so not subject to inheritance tax )IHT).
• Life insurance sum assured is paid out quickly to beneficiaries as there is no need to wait for probate.
• If premiums are paid from normal income without a reduction in standard of living, then the last 7 years premiums are not included in the estate for IHT calculation.
• If premiums paid due reduce standard of living but are within the annual gifting allowance of £3,000 pa (single life), £6,000 pa (joint lives), then premiums are not included in the estate for IHT calculation.
• If premiums are paid in excess of the annual gifting allowance or premiums paid reduce standard of living, they become ‘potentially exempt transfer’ (PET) and premiums paid within 7 years of death are included in the estate for IHT and estate calculations.
• Payment of sum assured must be made within 2 years of death otherwise there will be a requirement to register the trust with HMRC’s Trusts Register.

Should you set up life insurance in trust?

It is not complex, there are trust wordings for both new and existing life insurance policies that can be set up easily and the pros outweigh the small cons.  We believe all life insurance policies should be in trust and we are happy to help you should you need to put new or existing policies in trust.

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