Ensuring your family’s financial future is something important to plan for. Arranging your life insurance in the best possible way to maximise the benefits for those you leave behind is a vital consideration.
I briefly mentioned writing a life insurance policy in to trust in my post on why you need life insurance. Whilst this process isn’t necessarily the best route for everyone, it is usually advantageous and for that reason, I wanted to highlight those benefits here.
What is a trust?
A trust is simply a type of legal arrangement. It allows someone to set aside an asset to benefit a specified person or people (the beneficiaries). An asset within a trust is then managed by a trustee or trustees based on instructions from the person who set up the trust, until such time as the beneficiary is intended to benefit. As an example, a nominated trustee may look after a property on behalf of children under the age of 18 until they reach a responsible age.
Life insurance policies are such an asset; by putting a life insurance policy into a trust, it can affect what happens to the payout from a policy in the event of your death.
The key advantages of writing a life insurance policy into trust are as follows:
In the absence of a life insurance policy being written into trust, the payout from the policy would form part of your legal estate, and may therefore be subject to inheritance tax (if the value of your estate is above the current inheritance tax threshold). However, writing your insurance policy in to trust is a great way to ensure that any payout is not considered to be a part of your estate when you die. The proceeds from the policy can be paid directly to your nominated beneficiaries rather than to your legal estate meaning they wouldn’t be included in the estate value when inheritance tax is calculated.
Depending on your circumstances, this could mean the total value of your estate doesn’t exceed the threshold. With inheritance tax currently charged at 40%, this could save your beneficiaries 40p in every pound of your payout. Whilst you may not have assets right now which exceed the IHT threshold, don’t overlook this consideration as your assets – your home, your savings, your pension pot – should all increase in value over time.
Policy paid out before probate granted
When someone dies, before the executor of the will can sell or distribute any of the assets left by the deceased to their beneficiaries, they have to apply for ‘probate’. Probate is a legal process which confirms an executor’s authority to deal with your possessions.
Depending on the size of the estate and the type and location of assets, this process can take a long time, even when there is a will. In cases of intestacy (where there is no will), it can take an extremely long time, even dragging on for years for some estates.
Banks and building societies will typically freeze the accounts of a deceased customer until the executor has been grant of probate. However, in the case of a life insurance policy written into trust, the insurance provider will just require a death certificate before paying out to the beneficiaries. They do not require sight of the grant of probate. This means the money is available to your beneficiaries potentially a LOT quicker than if it goes to your estate.
Control over your policy
When you set up a trust, you are able to specify how you want the trust to operate i.e. how the trustees must oversee the asset for the benefit of the beneficiaries. If the payout goes in to your estate ‘pot’, it may end up used for all sorts of expenses including paying off debts and funeral expenses.
Is it expensive?
You should be able to write your life insurance in to trust for free when taking out the policy at no additional cost. Just ask upfront.
It may be possible to transfer existing life insurance policies in to trust.
If you read this post and consider that there would be specific advantages of putting your life insurance policy into trust, I recommend that you speak with an independent legal advisor.