Putting life insurance in Trust

Home Putting life insurance in Trust
Insurance Gosia Dawson
12 Apr 2023

Your life insurance policy is an important asset and putting the policy in trust can help avoid paying inheritance tax and get the claim paid quicker.

What is Trust?

A trust is a legal agreement that allows you to leave assets (like an insurance policy) to your friends, family, or other people you pick as your beneficiaries. A trust is managed by one or more trustees, which could be a family member, friend or legal professional. The trustees are responsible for the trust until it pays out to the beneficiaries, in this case upon your death. Trust can also be set up to pay for a specific event, for example, when a child reaches 18 years old.

Putting life insurance in trust is generally referred to as ‘writing life insurance in trust’, which would remove the policy proceeds from your estate for inheritance tax.

How does putting life insurance in Trust work?

To put life insurance into trust, you will need to start by deciding on the type of trust that best suits your needs. The most common types of trusts are bare trusts, discretionary trusts, and flexible trusts, each with its unique characteristics. Next, you'll need to choose a trustee who will manage the trust on behalf of the beneficiaries. It's important to choose someone trustworthy and impartial. You'll also need to name the beneficiaries who will receive the benefits of the trust. Once the trust deed is in place, you'll need to inform your insurance provider that you want to put your policy into trust, and they will provide you with the necessary forms. You will need to complete and return the form to your provider, who will then update your policy to reflect the trust arrangement. It's important to note that you will still need to pay the insurance premium to keep the trust running.

The Settlor

You are the Settlor who will set up the trust. You will need to decide on the type of trust that would suit you. There are a few options you can choose from, the most common are:

Bare Trust (Absolute Trust)

An absolute trust is established to benefit specific, named beneficiaries who are entitled fully to the trust. The beneficiaries cannot be changed in the future. The beneficiaries are entitled to the trust without delay as soon as it’s payable.

Discretionary Trust

In a discretionary trust, the trustees have more power and discretion over the assets after your death. They can assign beneficiaries and income from the trust and would act in line with your intentions outlined in the letter of wishes.

Flexible Trust

Flexible trusts are common with insurance policies and help trustees to vary the benefits through the ‘power of appointment’. There will be a ‘default’ beneficiary and additional beneficiaries can be added by trustees.

The Trustee

You will need to decide and appoint a trustee (or trustees). Trustees are the people responsible for managing your trust. You can appoint yourself as one of the trustees but we recommend there are more to take over in case of your death.

The Beneficiaries

The beneficiary is the person who will benefit from the Trust. You can name the beneficiaries or choose beneficiaries from a specific category, for example, “my children”. The terms of the trust are specified in the trust deed.

Who can benefit from life insurance in trust?

Anyone you would like can benefit from the Trust. This can be:

  • Anyone you name in the deed, your children, spouse, family member, or a friend
  • A category of people, for example, “my children”
  • A charity

If you set up an Absolute Trust, you will not be able to change the beneficiaries. In Discretionary Trust, the trustee can decide who would benefit from the trust.

Benefits of writing life insurance in Trust

There are many reasons why putting an insurance policy in trust is a good idea.

Control over assets

Putting life insurance in the trust would allow you to control how the money is used and who will inherit it. Setting life insurance in trust is especially important for unmarried (or not in a civil partnership) couples, who otherwise would not inherit the policy.

Faster access to the claim

While in trust, the payout from the insurance policy will not be subject to probate and funds will be available quicker.

Lower Inheritance Tax

Writing an insurance policy in the trust would mean that the proceeds from the policy will be outside the estate for the inheritance tax. However, depending on the chosen trust, there might be a tax charge on each 10th

Life insurance in trust for unmarried partners

It is important for couples who are not married or not in a civil partnership to have a will. If there is no will, the partners will not inherit each other's estate and have no claim on the insurance policy.

It is important to make sure your partner and children have legal and financial protection in place after you die. With life insurance in trust, you can ensure the claim is paid promptly, to the right people, with no inheritance tax payable.

Is there a cost to write insurance in trust?

No. There is no extra cost to write insurance in trust. You can do it at the time of setting up a life insurance policy or anytime thereafter. Contact your insurance provider for the right form or call us for more detailed advice.

In summary, putting your life insurance policy in trust is a useful way to ensure that your beneficiaries receive the proceeds of the policy, while also avoiding inheritance tax and potentially gaining faster access to the claim. A trust is a legal agreement that enables you to leave assets to your chosen beneficiaries, and you can select from various trust types such as bare trusts, discretionary trusts, or flexible trusts. You, as the Settlor, have the power to establish the trust and choose the trustee and beneficiaries. By putting your life insurance policy in trust, you can control how the money is used and who inherits it. It is also a good option for unmarried couples who would not otherwise inherit the policy. There is no additional cost to write insurance in trust, and you can do it at any time by contacting your insurance provider.

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