Everyone knows that, if you have dependents, it’s wise to take out life insurance.
But there is little understanding about one of the most important elements of a life insurance policy: Putting it in a trust.
When going through your life insurance application you will be given the option of writing the policy “in trust.”
This means that, if you die, any payout will be made from the trust in which the policy is held.
There are a number of advantages to using a trust, including that it is free to do so. Writing in trust comes at no extra cost to you.
You can name who the specific beneficiaries of the trust are, and also attach certain conditions, such as the age at which they are entitled to receive any money, before which named trustees will look after it.
Writing your life insurance in trust is also a great way to ensure that the beneficiaries of your life insurance policy receive all of the payout and quickly.
If your life insurance is not written in trust then the payout if you die within the policy term could be subject to inheritance tax on your estate if its total value rises above the threshold.
That might mean the taxman taking a chunk of the payout you intended to keep your family financially secure in the event of your early death.
Moreover, to access the trust its beneficiaries will only need to present a death certificate. This keeps it separate from the often lengthy and complex probate process to execute a will.
It enables the trust’s beneficiaries to receive the life insurance payout swiftly and with relative ease, potentially relieving some of the stress for your dependents if you die.
Absolute or discretionary
There are typically two types of trust that people choose to use for their life insurance policy: absolute or discretionary.
Put simply, the central difference between the two is flexibility. An absolute trust is fixed, so you cannot change the beneficiaries, whereas they can be altered on a discretionary trust.
The risk with an absolute trust is that you cannot change the beneficiaries in the event of a divorce, for example, or a broken down relationship.
But it also means that the trustees cannot alter the beneficiaries and the trust will work as you first intended it when setting it up.
With a discretionary trust, the trustees can make alterations to the split between the beneficiaries if you die, which may go against your own wishes.
You could also make alterations to the beneficiaries while you are still alive to add grandchildren or remove a former spouse, for example.
It is sometimes possible to write an existing life insurance policy in trust. But this should only be done with careful consideration.
Any payout upon your death may still be liable for inheritance tax if you died less than seven years after taking this decision as the trust will still be considered part of your estate.
Another important thing to remember is that if you are changing your existing policy to a new one you may need to set up a new trust.
Do not assume that the new policy will be written into the existing trust as, if there are no other assets held in there, it could be dissolved. Always seek clarity on this point and take necessary action.
Writing your life insurance in trust is a carefully balanced choice with lots of considerations.
When deciding what to do, you should seek professional independent advice so you are as informed as possible.