5 Good Reasons to Put a Life Policy in Trust
Why would you put a life policy in trust?
Very few people think to put a life policy in trust but if you take this relatively easy step it can have big advantages.
You can put a life insurance policy in trust either when the policy is first taken out or at a later date.
Here are five good reasons to put your life policy in trust:
Reason #1 Inheritance Tax
You could save 40% of the value of the policy proceeds just by ensuring that a life policy is held in a trust. This is the amount of Inheritance Tax (IHT) that could be payable when you die, depending on your circumstances.
It’s worth noting that if you take out a life policy specifically to pay any Inheritance Tax that may be due on your estate when you die, the policy should be written in trust. If you don’t put a life policy in trust the policy proceeds could be paid to your executors and increase the value of your estate further which could increase the IHT.
Any IHT saving will depend on 3 things:
- the type of life policy you take out, such as a whole life policy, or term assurance etc; and
- the type of trust you set up; and
- your personal circumstances at the time of your death.
Reason #2 Avoid Probate Costs and Delays
Many people take out a life policy to ensure their family has money following their death to pay bills and other expenses. If the money from the life policy is paid to the executors of the deceased there could be a period of several weeks or even months before the money can be released to the family, for example, while they wait for a Grant of Probate to be issued.
If the life policy is put in trust instead, there’s no need to wait for a Grant of Probate to be issued. The policy proceeds are payable to the trustees of the trust, not the executors. So as soon as a death certificate can be produced to the insurance company the money can be paid out. The trustees are then free to hand over the money from the policy to the family or whoever is named as the beneficiary of the trust.
Reason #3 Protect the Policy Proceeds
Depending on the type of life policy and its value quite sizeable sums may be payable following death. If the life policy is written in trust the money is protected. So if you don’t want the policy proceeds to pass into the hands of young, inexperienced beneficiaries or a vulnerable person the trust protects the policy proceeds. The trustees can hold the money in the trust until they are sure the beneficiary can handle it sensibly.
Reason #4 More Control
If your life policy is written in trust it guarantees that the money from it reaches the people you actually want to benefit. Money that comes into your general estate when you die must be used to pay debts or settle claims first before any of your family receive a share. Money from a policy that is paid to a trust is outside of your estate.
Reason #5 Flexibility
There can be a lot of flexibility in how the policy proceeds are used. Some types of trust arrangements give the trustees wide powers to decide how to invest and distribute the trust fund. The trustees may be able to use it to benefit several generations of the family over a long period of time. They may be able to distribute different amounts to beneficiaries according to their individual needs. The trustees may also be able to pay for goods or services on behalf of disabled beneficiaries in a way that makes sure their entitlement to state benefits remains unaffected.
Points to note
Not all policies are suitable to be written in trust. If the policy is intended to be used in connection with a loan or as part of mortgage protection arrangements then it will not be possible to write it in trust.
Although writing a life insurance policy in trust is often done to save Inheritance Tax there may be some situations in which it’s not the right thing to do. A lot will depend on your own personal circumstances and the type of trust you are going to use.
You should take legal advice if you are considering putting a life policy in trust. Why not ask us about our Trust Review service. We can help you examine your options and choose a solution that’s right for you and your family.
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