How To Write A Life Insurance Policy Into Trust
- dthenry5
- 4 days ago
- 4 min read
Fair warning - this isn’t going to be the most exciting thing I’ve ever written. No change there you might say…
But if you have life insurance, taking this one small step can have a massively positive impact on your beneficiaries when you are gone. It involves a bit of effort, but I promise it is entirely worth it.
Whenever any of us buy a life insurance policy, there is always a little box on the paperwork that asks if you want to write the policy into trust. It is usually a tiny, insignificant looking box.
But it is an important box - and it is almost always worth ticking it. Here’s why.
Unless a life insurance policy is written into trust, the pay-out will potentially be subject to Inheritance Tax.
Life insurance policies are often taken out for quite large amounts. And 40% of a big number is a big number.
If your total estate on death (including the policy) is worth less than £500,000 - then there isn’t much to worry about on this front as the pay-out won’t be subject to Inheritance Tax anyway.
Even if this is the case however, there is is another reason to get a life policy written into trust…
When life insurance pay-outs are written into trust, they can be paid out to beneficiaries without going through the probate process.
If you have ever been through the process of administering an estate, you will know that getting probate can be like pulling teeth.
Add in the fact that Inheritance Tax is often due before probate is granted, and in any case due at the end of the sixth month after the date of death, we can see how a lump of immediately available tax free cash could be useful to executors and/or beneficiaries either to settle an Inheritance Tax bill, or to pay for funeral costs.
OK so we have established that getting a life insurance policy written into trust is likely to be a very good idea for most people. So how do we go about it?
As I mentioned above, when setting up a new policy you can instruct that it is written into trust.
But don’t worry if you already have a policy in place, an existing one can also be written into trust retrospectively and you don’t necessarily need a solicitor to do this. Just contact your insurance company and ask for the relevant form (there is always a form!).
Nominating Individuals
The form will first ask you to enter details of the settlor, trustees and beneficiaries.
I have clipped the below from the relevant sections of L&G’s Flexible Trust deed to give you an idea of the potential layout.
The settlor(s) will be the person or people who are gifting these benefits into trust - these will usually be the individuals whose lives are covered by the policy.
The trustees are the ones who will administer the policy under the terms of the trust. They have an important job so think carefully about who you want to appoint.
The settlor will automatically be a trustee and at least one additional trustee must also be named.
Many couples will appoint themselves as trustees, but in such cases it is sensible to appoint a third trustee to administer the trust if neither of the couple are still around. In this case, as the trustee will be a third party, it must be someone you trust implicitly.
The beneficiaries are those who will inherit the proceeds of the policy. This can be anyone you wish.
Usually life insurance policies are written into discretionary trust and the trustees will have full discretion as to who they distribute the pay-out to (as long as they sit within the class of potential beneficiaries listed on the deed).
However you can name individuals either on the form, or in an accompanying “letter of wishes" to give the trustees guidance on whom you would like to eventually benefit.
Gifting or Retaining Benefits
The Trust form will also mention “gifted benefits” and “retained benefits”. If the insurance policy covers an individual for critical and/or terminal illness, this section deals with what happens in the scenario that the covered party falls ill before dying.
There are two options. The first one is that the policy pays out as normal to the affected individual, before they die. They can then put the money towards their care.
Alternatively, the settlor can choose to gift any benefits payable on falling ill. This means that the pay-out will be retained by the insurance company and paid to the beneficiaries via trust.
Choosing to gift benefits is useful for Inheritance Tax planning as it means that the pay-out will not be included within the deceased’s estate - but this will only really be an option for families who are wealthy enough anyway to cover the cost of care themselves from their own assets, without explicitly needing the pay-out.
Formalities
Trust deeds are serious legal documents, and therefore they need to adhere to stringent formalities in order to be binding.
The document needs to be signed by the settlors and the trustees - and each signature needs to be witnessed by an individual who is not previously named on the deed as either a settlor, trustee or beneficiary. Next door neighbours who you get on with are always handy at this stage…
Once it is signed and sealed, the form will need to be sent off to the insurance company.
They will subsequently return a copy of the Trust deed to you - keep this document safe, ideally alongside your will and notify the trustees of its location.
None of the above is intended to constitute specific advice to any individual. If you have any queries about your individual situation then please consult a regulated financial adviser.
Comments