What is the rationale behind having a protection policy written in Trust?
1. Avoid adding to an Inheritance Tax liability
2. Expedite benefit payments
3. Greater control
4. Better protection from creditors
Consider a protection policy with one life assured, who then dies. If the policy is not written in Trust, the insurer will pay the proceeds directly to the deceased’s estate following receipt of probate, which takes on average nine months. The value of the life insurance policy will then be added to the value of the deceased’s estate and distributed, potentially increasing the Inheritance Tax (IHT) liability. Any debts will be paid first.
By using a Trust, the proceeds will be paid straight to the Trust, bypassing the deceased’s estate, thereby not creating an additional IHT liability. There is no need to wait for probate, which can take months, so the beneficiaries can receive the proceeds quicker (the Trust will have specific instructions as to who the beneficiaries are).
Which protection policies should be placed in Trust?
It is generally good practice to place policies that pay-out on death, such as Whole of Life and Term policies, into trust, however Family Income Benefit, which pays a regular amount, would not usually benefit from being placed in trust as benefits would not be subject to IHT, although a single parent may wish to put the policy in trust for their children. Ill-health policies do not typically need to be placed in trust.
Types of Trusts
- Bare Trust
- Discretionary Trust
- Survivor’s Trust
- Split Trust
Bare Trust (Fixed or Absolute Trust)
Once the trust has been established, it is not possible to alter the beneficiaries.
Discretionary Trust
The settlor establishes potential beneficiaries within the trust, granting them the ability to receive benefits; trustees maintain the authority to determine the amount and timing of distributions to each beneficiary.
This Trust can be useful for young families that may have further children or grandchildren in the future. A Discretionary Trust is typically chosen over a Bare Trust because of the additional flexibility.
Survivor’s Trust
A Survivor’s Trust is a unique form of trust that permits a surviving settlor to receive the proceeds from the Trust, and can be established as either a Discretionary Trust or a Bare Trust. It would exclusively be used for ‘joint life, first death’ policies.
Split Trust
A Split Trust enables the policyholder to place their life cover into a Trust for selected beneficiaries while still retaining access to specific benefits. It is available as a Discretionary or Bare Trust with or without a Survivorship clause.
This type of Trust is commonly used with a life policy with an independent benefit unrelated to the death of the insured individual, such as added critical illness or terminal illness cover.
For further information regarding the inclusion of a protection policy in a trust, please contact one of our Client Directors listed below:
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