what is a trust?
Trusts are a simple legal arrangement that allows you to leave assets to friends, relatives, or whomever you choose as a beneficiary. A trust is managed by one or more trustees (family, friends, or a legal professional) until the trust pays its beneficiaries, which may be after your death or on a specific date, such as when a child turns 18.
Your life insurance policy can be placed in a trust, which is often referred to as “writing a life insurance trust.” One of the main benefits of this approach is that the value of your policy is generally not considered part of your estate.
Reading: What is a life insurance trust
how does putting life insurance in a trust work?
You will need to decide which type of trust is right for you. your options are:
- discretionary trusts: Your trustees have a high level of discretion over which beneficiaries to pay when you are no longer around, using your letter of wishes as a guide. Your letter of wishes describes your intentions as to how the trustees should manage the trust.
- a flexible trust – is a trust where there are two types of beneficiaries. The first type of payee is the default payee. these beneficiaries are entitled to any income from the trust as it arises. In practice, if the life policy is the only asset in the trust, there will be no income. The second type of beneficiary is the discretionary beneficiary. These discretionary beneficiaries only receive principal or income from the trust if the trustees designate them during the term of the trust. if no appointments are made by the end of the trust period, the default beneficiaries will receive all benefits.
- Discretionary Survivor Trust: This form of joint life insurance in trust pays the surviving policyholder; For example, if she dies before her partner, she would have the right to inherit her estate before her beneficiaries. If both policyholders die within 30 days of each other, their beneficiaries can benefit on the same basis as a discretionary trust.
- absolute trust: In this scenario, the beneficiaries are named persons who cannot be changed in the future. this includes children born later and the spouse after a divorce. The advantage of an outright trust is that payments can be made quickly without lengthy legal delays and, as with other trusts, inheritance tax is likely to be nil or negligible.
- a spouse or domestic partner
- a child
- a relative
- a friend
- a charity
- control over your assets: If you don’t have a trust, your money could be used to pay off outstanding debts. Placing life insurance in trust gives you more discretion, as you can decide who to designate as your beneficiaries and trustees. Setting up a trust is especially important if you are not married or in a civil union, as otherwise your assets may not be transferred to the intended recipient.
- Faster access to your money: Without a trust, when you die, your potential beneficiaries would have to obtain an estate, which can cause delays. With a trust set up, your loved ones could receive the estate within a couple of weeks of the death certificate being issued.
- Protect your beneficiaries from inheritance tax: Taking out life insurance in trust means that the money paid from your policy should not be considered part of your estate. There are exceptions; for example, you may be liable for an inheritance tax charge on the value of the property on each ten-year anniversary. currently the standard inheritance tax rate is 40%, which is levied on the portion of your estate above the £325,000 threshold.
once your trust is established, your trustees are legal owners of the policy and must keep the trust deed safe; they can ask a lawyer to save the documents or find a safe place in your home. Your trustees will ultimately file a claim with your insurer when you pass away, so they’ll need to have the trust deed handy.
It’s worth remembering that as the settlor, you have a responsibility to make sure your life insurance premiums are paid. It may be beneficial to retain legal counsel to ensure that the legal wording of your trust agreement is accurate.
Who can be a beneficiary?
You can choose any person or persons to be your beneficiaries; this will entitle them to a payment in the event a valid claim is made. Contrary to what some people may assume, there are no rules that restrict who can be the beneficiary of your life insurance. for example, you could choose the following:
While you won’t be able to change your beneficiaries if you have an absolute trust, if you get a discretionary trust, your trustees will be free to decide who your beneficiaries are and how much they are entitled to receive. receive from a payment.
the benefits of subscribing to a life insurance trust
There are many reasons why escrow life insurance is a popular option. Here are some of the ways you can benefit from a life insurance trust.
life insurance trust for domestic partners
according to data published in 2021, around 60% of the population of england and wales were living with a partner. the population that lives together grows; In 2020, 13.1% of the population aged 16 and over lived with a partner, compared to 11.3% in 2010.
Although there is no legal definition of a cohabiting couple, sometimes called a common-law partner, it generally means living together as a couple without being married. however, it is a mistake to think that common-law spouses have the same legal rights as a married couple or as partners in a civil union.
The truth is that there are no cohabitation rules in law, and a surviving cohabitant has no legal claim to their deceased partner’s estate unless they have left a will that includes their common-law partner. And, if a life insurance policy isn’t held in trust, they also won’t have any legal rights to the policy.
If you live together without marriage or civil union, it is even more crucial that you have clear legal and financial protection for your partner and children after your death. With a life insurance policy written in trust, the proceeds of the policy may be paid directly to your intended beneficiaries, rather than to your legal estate.
joint life insurance in trust
A joint life insurance policy covers both partners, but pays only once in the event of a valid terminal illness or death claim. this is usually after the first death, with the intention of financially supporting the surviving partner.
Once the policy has paid out, it ends, leaving the surviving partner without life insurance coverage under the policy. if both spouses die at the same time, then the lump sum would be paid to the estate of the younger life insured.
If the policyholders live together, the surviving spouse receives the lump sum, but for these calculations, half of the cash sum is considered to be part of the decedent’s estate. this is normally not a problem for married or civil unions.
With a joint life insurance policy, there is still a benefit to putting the policy in trust, especially if you are not legally married or in a civil union. For a married couple, life insurance policies include an inheritance tax exemption for the spouse or common-law partner, but this does not apply if they have a joint policy and are living together.
If you place your policy in a discretionary survivor trust, the trustees can pay any money to the surviving partner as long as they are still alive 30 days after their partner’s death.
If the surviving partner dies within 30 days of the other partner, the trustees can pay the money directly to the beneficiaries of the trust (for example, their children or grandchildren). In this way, the beneficiaries will generally not pay inheritance taxes on the money as part of their or their partner’s estate.
Married or cohabiting couples can choose to purchase a single life policy each, a joint policy that covers both members of the couple, or a combination of both. a single policy covers one person, and when that person dies, the policy pays a lump sum to that person’s estate. If a couple each have a policy, the policies remain completely separate from each other and can be for different amounts or with different companies, each paying when the policyholder dies.
Remember that life insurance is not a savings or investment product and has no cash value unless a valid claim is made.
How long does a trust last?
Technically, your trust can last up to 125 years (there is no expiration date for trusts created for charitable purposes), but ultimately, your trust agreement should last as long as you think it needs to. your personal circumstances may influence the time you stipulate; for example, the trust could last until a child grows up and marries.
is there any extra cost?
there is no additional cost to put life insurance in trust with legal & general. you can put your personal life insurance policy in trust when you buy it, or any time after that; you simply need to be the owner of the policy. You should be aware that if you transfer your life insurance policy to someone else, this may have implications for your trust, so it is best to contact us directly or seek legal advice.