Only 6 per cent of people put their life insurance in trust. Yet doing so could be very advantageous. We list the potential benefits, including avoiding going over the inheritance-tax threshold, and getting the benefits sooner due to bypassing probate.
When it comes to planning your family’s financial future, it makes good sense to take all steps possible to protect their standard of living. Arranging your life insurance in the right way - to give your loved ones the maximum possible benefit - is a further crucial consideration.
One sensible option to consider when taking out life insurance is putting the policy into a trust. And yet according to insurer Aegon, only 6 per cent of life-insurance policies in the UK are set up in this way. This is surprising as, although this process isn’t necessarily suitable for all policies, it can be very advantageous in the case of many.
What is a trust?
A trust allows you to set aside an asset to benefit a specified person or people (the beneficiaries). The asset is managed by a trustee until such time as the beneficiary is intended to benefit. So, for example, your spouse may look after property on behalf of your children until they reach a responsible age.
Life insurance policies are such an asset, and putting a policy into a trust has huge consequences on what happens to the payout from a policy in the event of your death.
Note: In industry jargon, putting a life insurance policy into a trust is known as “writing life insurance in trust” or a policy is “written in trust”.
The principal advantages to putting a life insurance policy into trust are as follows:
Trusts can help sidestep inheritance tax
The biggest advantage relates to tax. Under normal circumstances, the payout from a life insurance policy will form part of your legal estate – and may therefore be subject to inheritance tax. The threshold for inheritance tax in the UK is £325,000. Tax is payable at 40 per cent on any part of an estate above this level.
By writing a life-insurance policy in trust, the proceeds from the policy will be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when inheritance tax is calculated. This means the value of your estate may not move above the threshold, depending on your circumstances.
It is also important to remember that any inheritance tax is payable within six months of a death. By putting life insurance in trust, it may help your family meet a tax bill.
You don’t need probate to be granted in order for the policy to pay out
Writing a policy in trust also means payment to your beneficiaries is likely to be quicker, as the money will not go through probate. This is a legal process which confirms an executor’s authority to deal with your possessions. So, for example, if you leave everything to your spouse in your will, then your spouse will have to get probate granted before they can distribute your money, property and so on. This process 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 life insurance policy is put into trust, then it can potentially pay out long before probate is granted, as the insurance provider will just require a death certificate before paying out. Obviously it is better for a family to get an insurance payment as soon as possible, as the period following a death is stressful enough without being concerned about where the money’s coming from.
You get greater control over your policy
Writing life insurance in trust allows you to specify how you want the proceeds to be paid out. For example, trustees can be appointed to oversee money for the benefit of children under 18.
In addition, setting up a trust means that the payout will go to the people you intend it to. If you owe money at the time of your death, it will be paid to your loved ones rather than to creditors.
What are the drawbacks?
Generally speaking, there are none. Although many find that policies held simply to pay off a mortgage - rather than to support their dependants - are best not written in trust.
Does it cost extra?
No. Your insurance provider should be able to provide you with this option for free when taking out the policy. Some existing life policies can also be transferred into trust.
Read more about why life insurance is good to have.
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