Life insurance and trusts

What is a trust?

A trust is a legal arrangement where certain individuals, referred to as trustees, are granted permission by you, the settlor, to manage the policy on behalf of your beneficiaries. You will outline your preferences  for what happens with your life insurance proceeds if you die during the policy term. It then becomes the trustees' responsibility to claim on your policy and ensure the beneficiaries receive the funds as you intended  upon your death or at a specified time in the future.

Before we go into more detail it's important to know that trusts are legal documents with significant implications that may affect your rights, obligations, and tax position, as well as those of the beneficiaries involved. Before proceeding, it's crucial to ensure that you fully understand the implications and that the trust aligns with your objectives. If you have any doubts or uncertainties, it's advisable to seek appropriate legal guidance.

Please be aware that while we can provide information to assist you in making informed decisions, we do not provide advice on what actions to take.

Trust terminology

Trustees are designated individuals responsible for overseeing the trust, handling future claims, and ensuring funds are distributed to beneficiaries according to the settlor's directives.

While the settlor is automatically a trustee, it is advisable to appoint at least two additional trustees. Upon the policy's transfer to the trust, trustees assume legal ownership of the trust fund and must prioritize the best interests of all beneficiaries, adhering strictly to the trust deed. Trustees must be at least 18 years old.

Beneficiaries refer to the individuals designated to receive funds from the trust. They may also serve as trustees if they meet the age requirement of 18 or older.

What are the main benefits of putting life insurance in trust?

1. Control: By establishing a trust, you have the authority to designate your beneficiaries and trustees. This becomes particularly significant if you are unmarried or not in a registered civil partnership because, without a trust, the policy's proceeds become part of your estate, potentially complicating the distribution process. In situations involving children, a trust can ensure they receive financial support without granting them full access to the funds. As a trustee during your lifetime, you collaborate with other trustees to ensure the funds are distributed as intended.
2. Inheritance Tax Avoidance: Without a trust, a life policy typically contributes to your estate, subjecting it to inheritance tax. Utilizing a trust should exempt the life insurance payout from inclusion in your estate, thereby increasing the amount inherited by your beneficiaries.
3. Expedited Payment: Establishing a trust can facilitate faster payment of your life insurance proceeds to your beneficiaries. This bypasses potential delays associated with estate proceedings, such as obtaining probate, ensuring that the funds reach your intended recipients promptly.

What are the main drawbacks of putting life insurance in trust?

1. Difficulty in Revocation: In certain instances, cancelling a trust after its establishment can pose challenges. It's crucial to understand all the terms outlined in the trust before determining its suitability for your needs.
2. Trustee Approval Requirement: Once a policy is placed in trust, any future decisions concerning the policy will need approval from the trustees. For instance, if you want to adjust the level of cover due to changing circumstances, the insurer will only accept instructions from the trustees.
3. Limited Flexibility of Certain Trusts: Some types of trusts offer less flexibility than others. With an 'absolute' trust, for example, modifying the named beneficiaries in response to changing circumstances may not be feasible.

How much does it cost to put life insurance in trust?

Putting your life insurance in trust doesn’t cost you anything. It’s a free service provided by most insurers.

However, trusts can sometimes be a complex process and if you choose to seek further financial advice there may be a cost to this.

Please note, we are unable to advise you on whether a trust is the right option for you. Although we aim to provide you with enough information to help you make an informed decision.

What are the different types of trust?

Different types of trusts are available, and the suitability of each depends on the type of life insurance chosen and the desired level of flexibility.

Two important variants to consider before a selection is made on trust type would include:

1. Split Trusts. This lets you split out the benefits of a Life with Critical Illness policy so that the Critical Illness payment and any other illness related benefits will go to you, and the death claim will go to the specified beneficiaries. Split trusts can also be used for life insurance policies to ensure any terminal illness payment is paid to you in the event you are diagnosed with a terminal illness
2. Survivor’s Trust/Clause. This trust is for joint life insurance policies and some joint life and critical illness policies. If one of you dies, the other gets the money before anyone else. If you both die within a short time typically 30 days, the money goes to other beneficiaries as decided by the trust.

Types of Trust

Absolute Trusts (also known as 'Bare' or 'Fixed' trusts):

• This option grants the settlor the highest level of control.
• Beneficiaries are named during trust setup.
• The settlor determines the distribution of the payout among beneficiaries.
• Decisions made cannot be altered.

Survivor’s Discretionary Trusts:

• This type of trust includes a 'survivorship option' for joint life insurance policies.
• It allows a surviving joint policyholder to benefit from the policy ahead of other beneficiaries.
• Often used for unmarried couples.

Flexible Trusts:

• Beneficiaries (referred to as 'default' beneficiaries) are named.
• Potential beneficiaries (e.g., future grandchildren) can also be named.
• Trustees possess the authority to modify default beneficiaries.
• Trustees can adjust the distribution of the payout between default and potential beneficiaries as per the settlor's wishes.
• May be suitable if circumstances are expected to change, though it offers less control over payout recipients.

Discretionary Trusts:

• The most flexible trust option, with no named default beneficiaries.
• A list of potential beneficiaries is provided, granting trustees full discretion over beneficiaries and payout amounts.
• Potential beneficiaries can be added over time.
• The settlor has no control over payout recipients, as this is determined by the trustees.
• A 'letter of wishes' can be sent to guide payout distribution, but trustees are not legally bound to follow it.

Why should unmarried couples consider a trust?

If the policy is not in trust and there is no will, the policyholder’s partner would not be entitled to the policy proceeds.

To access the money their personal representatives may need to obtain probate so that they have the authority to deal with the estate.

However, the personal representatives can usually only apply for probate to be the administrator of the estate if they are the person’s next of kin, e.g., their spouse (or registered civil partner) or child. They can also apply if they’re separated from the person but were still married or in a registered civil partnership when they died.

Unfortunately, it's not possible for someone to apply for probate if they were the partner of the person but were not their husband, wife or registered civil partner when they died.

The policy money will then be distributed in accordance with the will, or the laws of intestacy if there was no will. This means there could be a delay before the partner receives the policy money or if children are involved it could be mean that the money goes to them in accordance with the laws of intestacy.

The worst case could be if the policyholder is not married or in a registered civil partnership and has not made a will, as their partner would not be entitled to the policy proceeds at all unless placed in trust.

Why should joint policy holders consider a trust?

A trust is a good way to help decide now who should benefit from the insurance money.

When does a trust end?

The trust will usually only end once the policy has ended and there is nothing left in the trust - this could be once a claim has been made and the trustees have distributed all the insurance money to the beneficiaries. Or it could be if the length of time the policy was taken out for has ended and a claim has not been made.

Can the trust be cancelled?

Once the trust has been set up, it cannot usually be cancelled before it's served its original purpose. This means it's important to be sure trusts are right for the policyholder before they complete one.

When can a trust be set up?

The policyholder can put their personal life insurance policy into trust at any time after they take it out. Sometimes people transfer ownership of their life insurance policies - for example by providing it as security for a loan, or to pay for a funeral where the policy has funeral cover - which may mean that a trust cannot be used.

Who controls the trust?

The trustees control the trust. They are the legal owners and they are responsible for managing the trust. Following a claim on the policy they will arrange for the payments to be made to the beneficiaries.

The settlor does not control the trust, though they are usually still responsible for paying the premiums on the policy.

The beneficiaries do not control the trust, although in some circumstances they can force trustees to act, for example, with an absolute trust, if all the beneficiaries are over 18 years old and of sound mind, they can act together to give directions to the trustees.

Can a joint policy be put into a Trust?

Yes, in most circumstances. However, it's important to note that with the Discretionary, Absolute and Flexible trusts, if the money from the insurance policy is payable on the first person to die (the first settlor), the surviving person on the policy would not be a beneficiary and therefore would be unable to receive any of the money. If the policyholders want the surviving person or life assured to be a beneficiary of the trust an option might be a Survivors Discretionary Trust.

A Survivors Discretionary Trust is a special trust that is for use with joint life insurance policies that pay out on the first death. The surviving person becomes the beneficiary, but if they should die within 30 days of the first to die then the children or other loved ones become the beneficiaries automatically.

How to put your policy in trust

If you’ve decided to proceed with a trust, please use the link to your insurer's website below to complete the relevant forms. If you need help completing these, please get in touch with your adviser who will assist you where they can.

AIG https://www.aiglife.co.uk/customers/literature/trusts/

Aviva https://www.aviva.co.uk/insurance/life-products/life-insurance/aviva-trusts/

L&G https://www.legalandgeneral.com/existing-customers/personal-protection-trusts-tool

HSBC https://www.life.hsbc.co.uk/customers/protection-products/trusts

LV https://onlinetrusts.lv.com/

For the following insurers please contact your adviser who'll help with the next steps.

Guardian*  

Royal London*

Scottish Widows

The Exeter

Vitality  

Zurich

 *Please note if your policy is held with Guardian or Royal London and you’ve exercised their beneficiary nomination service then putting a policy into trust will supersede this action.

L&C Disclaimer

It’s important that you know that it’s your responsibility as the policy holder to communicate directly with the insurer to make sure that the policy is placed in trust. You should assume that the policy has not been placed in trust until you have had official confirmation from your insurer. L&C can’t be held liable for any losses, costs, or financial implications, including but not limited to inheritance tax(IHT) liabilities, that may arise due to the policy not being placed in trust.

Trust documents have legal importance and can impact your rights, responsibilities, and taxes, affecting both you and the beneficiaries. Make sure you understand how it works and if it achieves your objectives. Seek legal advice if unsure.

Your insurance benefit won't be considered under trust until the insurer receives fully completed and signed trust documents.

Putting your life assurance into trust is typically free and offered by most insurers.

Trusts can be complex and if you seek additional financial advice elsewhere there might be charges involved.

Please be aware that we don’t offer advice on the suitability of trusts but aim to provide you with enough information to make an informed decision.‍