Putting money or assets in trust can be a highly effective way to secure your wealth for your loved ones.
When you (known as the “settlor”) create a trust, you are essentially setting a portion of your wealth aside for whoever you choose – these individuals are known as your “beneficiaries”.
You then name a “trustee” to oversee the trust. In many cases, they will be responsible for giving your beneficiaries access to the wealth at the appropriate time.
You can put various assets in trust, including:
Interestingly, you can also put a life insurance policy in trust. This essentially means that the payout from the policy is removed from your ownership and given to the trust and trustee to distribute when appropriate.
This is an option that many people seek to use, as it can be advantageous to your wealth for various reasons.
However, it can also be complicated, and it’s often sensible to work with a professional so you can be sure that you’ve correctly set up the arrangement.
Read on to discover three key benefits of putting life insurance in trust, as well as a couple of elements to consider before you do so.
1. You can have greater control over how your money is used
Firstly, by putting your life insurance policy in trust, you can instruct your trustee as to how you would like this wealth used on your death. As a result, this gives you an element of control over your money.
By having this in place, your money can be initially directed to your loved ones rather than, for example, going towards paying off outstanding debts in the first instance.
This can also be useful if you’re not married, or if you have remarried but have children from a previous relationship. By using a trust, you can select who can benefit from your wealth, ensuring that your money goes to those you want it to.
It’s worth bearing in mind that putting any money or assets in trust, including a life insurance policy, is irrevocable and means you no longer own the wealth – it essentially belongs to your beneficiaries.
So, while you might have more say over how the money is administered when you pass away, you won’t have this same control now.
It’s important that you’re comfortable with this before you put any assets in trust, whether that’s money and investments or your life insurance policy.
2. Your beneficiaries may be able to receive their inheritance quickly
When you pass away, your loved ones will typically need to have probate before they can access and divide your wealth. According to Unbiased, this usually takes a minimum of six months to be granted, and a year on average.
Meanwhile, having a life insurance policy in trust often means your beneficiaries can receive this payout as soon as they have a death certificate. After registering the death, this can take as little as a few days.
So, by having a policy in trust, you can instantly pass wealth to your loved ones. This could be instrumental in meeting associated costs, such as solicitor’s or funeral fees.
This may also be useful if you have a significant Inheritance Tax (IHT) liability. Charged at 40% as standard, you may be leaving your family with a sizeable bill if your estate exceeds certain thresholds. They’ll usually have to file an IHT return at the same time as applying for probate.
But again, if there were a life insurance policy in trust, they’d be able to access this wealth once they had the death certificate. They’d then be able to use this money however they see fit – including quickly settling a potential IHT bill.
Having access to this wealth sooner could help to reduce the stress of working out how to settle the tax charge from the remainder of your estate.
3. You may be able to reduce an Inheritance Tax bill
As well as being able to use a life insurance payout to quickly settle an IHT bill, you may also be able to reduce how much tax your beneficiaries might face on your death.
That’s because assets in trust fall outside of your estate for IHT purposes. As a result, the payout from a life insurance policy in trust wouldn’t be considered when your executors come to calculate the total value of your wealth on your death.
Furthermore, if your policy is held in trust and you’re no longer benefiting from it, your premiums can be treated as “gifts” under the “gifting from income” exemption for IHT.
This means that you can pay the premiums directly from your income, with the value immediately falling outside of your estate.
Life insurance premiums can be quite high, especially in later life. So, by holding a policy in trust, you may be able to further reduce the value of your estate and the potential IHT bill as a result.
Bear in mind that gifts from income must not affect your standard of living, and you must keep paying the premiums regularly for this to count.
It’s also worth noting that if you have a life insurance policy that isn’t held in trust, the payout will ultimately be added to the value of your estate. This could actually exacerbate your existing IHT liability, rather than reduce it.
This is why working with a tax specialist is vital. An experienced professional can offer guidance and suggestions to help you make sensible decisions in your circumstances.
It’s important to work with an expert before you put assets in trust
Before you put a life insurance policy in trust, it’s crucial to speak to an expert. That’s because there are different options and rules surrounding trusts that it’s important you consider carefully.
Firstly, there are various different types of trust. It’s vital that you select the trust that’s most appropriate to your circumstances. Choosing the wrong type may ultimately make things more difficult for your family.
Furthermore, while there are potential tax benefits of putting life insurance in trust, it’s often worth considering doing this sooner rather than later.
That’s because it’s possible for HMRC to view this as a gift from your estate in certain circumstances – for example, if you are in serious ill health.
In turn, this could affect your tax position and the bill your beneficiaries may ultimately face. So, it’s often sensible to take advice from an expert before you make any decisions.
Get in touch
If you’d like to find out whether putting life insurance in trust could be a suitable strategy for you, we can help.
Email email@example.com or call 0113 262 1242 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, will writing, or trusts.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.