Life insurance, levelled up: why trusts can be a game-changer
What is a trust and what does it do?
- A trust is a legal arrangement allowing a person to transfer money or assets (such as property, life insurance, investments or other possessions) out of their estate and ‘gift’ them to someone else (the beneficiary)
- We’ll assume the asset being placed in trust is a life insurance policy
- This is done by creating a 'trust deed', which details who is involved in the trust (the parties to the trust) and the terms of the trust (the trust provisions)
- Normally, placing a policy in trust is an 'irrevocable act', which means once the policy is in trust this decision can't be reversed later on
Who's needed to set up a trust?
The ‘settlor’
The settlor is the person who creates the trust, sometimes referred to as the 'donor'. The settlor sets the rules for how the money in the trust should be managed and who should benefit from it.
The ‘trustees’
A trustee is the person or company chosen to look after and manage the trust. The trustee acts in the best interests of the beneficiaries, making sure everything is managed fairly and responsibly.
The ‘beneficiaries’
The people who will benefit from the money placed in a trust. This could be a spouse, civil partner or children – the settlor can nominate anyone they like.
Advantages
- Your loved ones get the money faster. A trust means policy proceeds are usually paid quicker. Providing there’s at least one surviving trustee, so they won’t need to wait for probate
- The pay-out goes to the right person / people. You choose the trustees, and decide who receives the proceeds when you pass away
- It can help reduce or avoid inheritance tax. When a policy is written in trust, the pay-out usually isn’t counted as part of the settlor’s taxable estate on death
Disadvantages
- Once your policy has been put in trust, you can't usually change your mind and reverse this decision later on
- You're giving up ownership and sole control of your policy, although you would be one of the trustees, so during your lifetime you would have some control
- If you want to make changes to your policy we may require permission from your trustees to do that
- As the legal owners your trustees will receive correspondence relating to your policy including copies of communications related to missed premiums or under-payment
We've based this information on our understanding of current UK law and HM Revenue and Customs practice. For more information please refer to:
Bear in mind that any changes to these rules could affect how proceeds are treated for tax.
Types of trusts available
We offer different trusts you can choose from based on the different types of cover available and who you’d like to receive the proceeds when you pass away.
We've shown a selection of the most commonly used trusts in the table. Others may be available as part of the advised sales process.
| Type of trust | Applicable to single or joint life policies? | Flexibility to allow for changes to beneficiaries? | When it’s suitable |
|---|---|---|---|
| Absolute Trust | Single life and joint life second death policies | No | Allows you to make an outright, absolute gift to your chosen beneficiaries. This trust doesn’t allow you to make any changes to the beneficiaries or allow the donor to benefit from the trust at any time. |
| Discretionary Trust | Single life and joint life second death policies | Yes | Provides the flexibility to choose how you’d like to distribute your benefits to your chosen beneficiaries and make changes to them if required. If you have critical illness cover this type of trust means you can also still benefit from that cover whilst you’re still alive. |
| Discretionary Survivorship Trust | Joint life first death policies | Yes | Designed for use with joint life first death policies only. This trust allows the death benefit to be paid to the surviving settlor. |
Your guide to being a trustee
The role of trustee is very important and to help you understand your duties and responsibilities, you and your chosen trustees should each read this guide before agreeing to be a trustee.
Got a question?
Take a look at some of the most frequently asked questions about putting a life insurance policy into trust.