Life Insurance In Trust
What is a trust?
Put simply, a trust is an arrangement under which assets, such as property, money, or, from the perspective of this website, the proceeds of a life insurance policy, are held ‘on trust’ by trustees, for the benefit of beneficiaries.
What is the benefit of putting a life insurance policy in trust?
A life insurance trust is a recognised means of making sure, if you die, the payout from your life insurance policy is paid out:
- To the person or people you want to look after
- Without having to wait for Probate to be granted
- Subject to certain conditions, with no liability to Inheritance Tax
What happens if your life insurance is not in trust?
Very often, I see life policies that have been set up in such a way that, if the insured person should die, the policy proceeds would simply be paid into his or her estate. This is known as ‘own life’
If your life insurance is an ‘own life’ policy, then on your death, the payout will go into your estate and won’t be paid out until probate is granted, which may be weeks or even months.
If you’re married and have left the proceeds to your spouse, he or she won’t have any Inheritance Tax to pay. However, if you’re not married, or if your spouse doesn’t survive you, the pay out may be liable to Inheritance Tax.
However, if your policy is in trust, the payout on your death will not form part of your estate and will therefore not be liable to Inheritance Tax.
Should I put my life insurance in trust?
You may now be thinking that all life insurance should be set up in trust. However, while there are advantages to putting a policy in trust, there are also disadvantages. It is definitely not right for all circumstances and there are many situations where it would very much be the wrong thing to do. It is also a ‘once and for all’ decision, as once a policy has been placed in trust, it is not normally possible to subsequently take it out of trust.
Is there a downside to putting a life insurance policy in trust?
To make the proceeds of the trust effective against Inheritance Tax, you would have to give up the right to receive the policy proceeds under any circumstances.
You might think this doesn’t matter for a death-only policy. However, many so-called death-only policies include terminal illness cover. This means the policy will pay out if you’re diagnosed as being terminally ill, i.e. if you have less than 12 months to live, with no prospect of recovery. In this case, your policy will pay out to you, while you are alive.
However, if your policy is in trust, and, in order to make it effective against Inheritance Tax, you gave up the right to be paid the money from the policy under any circumstances, it means you can’t have the money if you have a terminal illness.
Therefore, when considering whether or not to put your policy in trust, you should be absolutely sure that you’ll never want the money for yourself if you are terminally ill. It would be possible to put your policy in trust and to reserve the policy proceeds for yourself if you should have a terminal illness, but this would mean that you have reserved a benefit for yourself, and it’s likely that HMRC would treat the proceeds as part of your estate for Inheritance Tax after all.
So what should I do?
Putting a policy in trust is an important decision, and you must be aware of all of the potential advantages and disadvantages before you make a decision. I would be delighted to advise you on this matter. Call me or use the form below to contact me for advice.
Trusts are not regulated by the Financial Conduct Authority