To Trust or not to Trust?

 

why you should consider writing your life insurance in trust

Life insurance is, for most people, a mundane topic.  It’s one of those necessary expenses if you’ve got a mortgage, or anyone who is financially dependent on you, but talking about it is never going to be top of the list of dinner conversations.  Not for me though.  It’s a topic very close to my heart.

In 2002 I was about to embark on my first job in financial services, when my brother was diagnosed with Acute Lymphoblastic Leukemia.  While I was sat in my induction course my brother was in hospital, where he would remain for many months, and when the topic of insurance – and especially life & critical illness cover – was discussed, I took note because it was now personal.  Since then I’ve always been passionate about ensuring my clients are fully informed on all the options available to them.

When it comes to planning your family’s financial future it is vital to take all the steps possible to protect their standard of living.  Arranging your life insurance in the right way, to ensure maximum benefit for your loved ones, is important.  One option, which is greatly underused, when taking out life insurance is to put the policy in Trust.

What is a policy written in trust?

A trust is a simple legal arrangement that allows you to gift your life insurance policy to someone else, e.g. your spouse/partner.  It is a great way to ensure that your life insurance is not considered to be part of your estate when you die, thus avoiding probate and potential inheritance tax, and that the proceeds are used exactly as you intended.

The main benefits of writing life insurance in trust –

  • CONTROL

You specify who your beneficiaries are and who you trust to act on your wishes. 

If you are not married or in a civil partnership, and do not have a will, the government will distribute your estate using the laws of intestacy. This could have financial implications on your partner, especially if you have a mortgage and dependents.

An example of the risk – if you have a joint mortgage and die, unless your life policy is set up correctly, your partner may not benefit from your life insurance as the intestacy laws will look for immediate family, and they may not be able to pay off the mortgage.

If you are married or in a civil partnership and do not have a will, again the government will use the laws of intestacy to distribute your estate.  The financial implications on your spouse and any dependents could be significant, not least because of the length of time it would take for the legal process to conclude and probate to be granted.

If you have a mortgage, the lender will still expect payments to be made and the household bills will still need to be paid.  This could severely impact your family if there is a delay in the life insurance paying out.

Click on the link for more information how intestacy could affect you and your loved ones.

What happens if you die without a will

It is important to have a will in place, and something that I always recommend, however many people just don’t get around to doing it.  Taking out life insurance and writing it in trust is one way of ensuring that your policy pays out to your intended beneficiaries, in a timely manner.

Wills can be contested. 

We’ve all read the newspaper articles where even though a valid will existed, it has subsequently been contested causing long delays in finalising probate and incurring financial cost to all parties.

Writing your life insurance in trust could mitigate these risks.  A policy written in trust does not usually form part of your estate and therefore married/civil partnership or not, a valid will or not, the proceeds will pay to your beneficiaries as you have set out in the trust documents.

  • INHERITANCE TAX

A policy not held in trust will form part of your estate, meaning that it could be subject to inheritance tax – 40% of any part of your estate over £325,000 (as at October 2015).  Using a trust should mean that the money paid out from your life insurance will not be part of your estate, increasing the amount of money passed on to your loved ones.

The link below gives more information on how inheritance tax could affect you and your loved ones.

More information on Inheritance Tax

  • FASTER PAYMENT OF THE MONEY

You don’t need probate to be granted in order for the policy to pay out.  Using a trust should help ensure that the money paid out from your life insurance can be paid to the people of your choice quicker.  Probate can take a long time, even when there is a will.  In cases of intestacy, it can drag on for a lot longer.

However, if the policy is put into trust, then it can potentially pay out long before probate is granted, normally within weeks, as the insurance company usually just require a death certificate before paying out.

The period following the death of a loved one is stressful and painful enough, without having to worry about where the money is coming from.

Who is involved?

There are three key roles in a trust.

The SETTLOR (or settlors) – The settlor is the person who is giving away their life insurance policy.  If it is a joint policy, then both policy holders are automatically joint settlors. The settlor chooses the trustees and the beneficiaries and completes the trust forms to set up the trust.

The TRUSTEES – The trustees are the people you choose (i.e. sibling/friend) to look after the trust, make any future claims, and arrange for the money to be paid to your beneficiaries in line with your instructions.  As the settlor you are automatically a trustee.  Once the policy is put in trust the trustees take legal ownership of the trust fund from you and must then act in the best interest of the all the beneficiaries at all times, and can only do what is allowed in the trust deed.

The BENEFICIARIES – These are the people (or person) who you want to receive the proceeds of the life insurance policy.

How do trusts work?

Setting up a trust means that you give your life insurance policy to the trustees who then legally own your policy and look after it for the benefit of your beneficiaries.  You will still be responsible for paying the premiums.  They make the claim on your policy should you die and ensure the money goes to your beneficiaries as you intended.

Depending on the type of trust you set up, it can provide lots of flexibility to change who will benefit and when, so that your changing circumstances – such as having more children or grandchildren – can be taken in to account.

Who can set up a trust?

Most life policies can be put in trust, so anyone who owns a policy can set one up. 

What do they cost?

Most life insurance companies provide this service for FREE.  It is a simple process.  In just a few steps you can ensure that your life insurance is put in trust, so it goes to who you intended, faster, and without a lengthy legal process. 

How to set up a trust?

Setting up a trust is simple.  If you are taking out a new insurance policy, the trust forms can be completed at the same time as the application.  As a broker I help my clients during the entire process to ensure all the paperwork is completed correctly as well as explaining to the trustees their role and future responsibilities.

If you have an existing policy, you may be able to put it in trust by obtaining the paperwork from your current provider.

What are the disadvantages?

Once the trust has been created it cannot usually be cancelled before it has serviced its purpose and the policy cannot be cancelled without the permission of the trustees.

As with all insurance policies conditions and exclusions will apply.

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