If you are looking to transfer your life insurance into a trust to be managed for the underlying beneficiaries, there are various options available. This is one of the more complex areas of life insurance and not one which should be tackled without professional advice.
You may inadvertently create tax obligations which can significantly reduce death benefit payments.
Whether looking at discretionary gift trusts or survivor trusts, there are numerous ways in which you can use life insurance to provide income for trust beneficiaries going forward.
A trust means that any life insurance pay-out would be managed on behalf of the beneficiaries, usually if they are children. You'll need a solicitor as they are complex legal agreements, and you'll need to appoint executors of your will to manage it.
The trust structure provides a more controlled environment in which funds can be drip-fed to beneficiaries or lump sum payments made where applicable. In effect, it is a way of controlling the flow of money from your estate to the beneficiaries.
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In order to set up a trust, you will require a legal framework, provided by a solicitor or insurance company, together with a settlor, trustees and beneficiaries. The settlor is usually the person who sets up the trust and transfers the life insurance policy - you.
The trustees, you would normally be one, are legally responsible for the management of the trust and the distribution of funds to beneficiaries. The beneficiaries are those who will benefit from the trust assets through lump sum and regular payments.
Life insurance companies such as Aviva offer various trust services which include the Aviva Discretionary Gift Trust. This is a flexible trust which will receive funds from your life insurance policy upon your death.
Working in tandem with other trustees, you can remove and add various beneficiaries and also stipulate conditions upon which funds will be distributed.
A survivor trust is more applicable for couples who have joint insurance policies which will payout to the surviving partner upon the death of the other. Trustees within a survivor trust have scope to make payments to the surviving partner from the life insurance proceeds.
The surviving partner will need to live at least 31 days after the death of their partner to receive life insurance proceeds. In the event that they died before the 31-day cut-off point, then payment could be made to beneficiaries without any inheritance tax obligations. Tax regulations change from time to time, and it is important to take advice before distributing any funds.
The current legislation surrounding trusts and life insurance proceeds is fairly complex; therefore, it is very important to take professional advice before setting down this road. There are costs in setting up and maintaining trusts so if you can find a cheaper alternative; it may be worth considering.
There are also fairly complicated tax issues to take into account, which could lead to potential tax liabilities if the trust and payments are not administered correctly.
No. There are numerous factors that will dictate life insurance premiums but whether the policy is held in a trust or not is irrelevant. Indeed, it is more common for life insurance policies to be “written in trust” which effectively removes them from the estate of the deceased and shielded from inheritance tax.
There are various factors to consider when calculating life insurance premiums which include age, gender, health history, smoking habits, hobbies and occupation. Then you will need to consider what premiums you can afford and the level of cover this would provide.
While many people see trustees as the guardians of assets held within a trust, their liabilities and obligations go much further. They are legally charged with the management of the trust and the assets held within, together with the distribution of funds to beneficiaries in line with the deceased’s wishes.
It is very important that you have trusted parties operating as trustees because upon your death, they will be carrying out your wishes.
There may be situations where third parties can legally challenge the beneficiary of a life insurance payment. There are two things to consider here. Firstly, it is not the role of the insurance company to get involved in any legal challenge.
However, the courts can intervene to make changes to life insurance payments where they feel certain parties have been disadvantaged. In the event that a life insurance payment is challenged in the courts, this could result in a significant delay.
As a side-note, interest earned on life insurance proceeds during the delay in a settlement may attract an income tax liability.
There are many ways in which a trust can prove useful in managing life insurance proceeds and potentially other assets associated with the deceased. It may be that the potential beneficiaries are too young to receive the funds, maybe not in a position to handle additional funds or simply not available at the time.
In simple terms, a trust is a way to manage cash flow to the beneficiaries and can, in certain circumstances, offer a very efficient tax vehicle.
There are various benefits when placing life insurance in a formal trust structure, but one of the main disadvantages is the difficulty in making any changes to the trust structure/rules.
In some circumstances, it may be possible to amend a trust, but normally once a life insurance policy has been placed in the trust, it can be difficult to remove – other than distributing proceeds to the beneficiaries. Even legitimate legal challenges against a trust structure/trust rules can be expensive and time-consuming.
This process is a lot simpler than many people think. When setting up a trust for life insurance you will need three participants:-
There are many different types of trusts which you can set up, but trust for life insurance is relatively straightforward and fairly common practice today.
When looking for the best policy for your situation, you will come across both independent and tied life insurance brokers. There seems to be a general consensus that independent insurance brokers are always more competitive, but this is not always the case. We will now take a look at the merits of an independent and tied insurance broker.
The main benefit of an independent insurance broker is that they have no restrictions. An independent life insurance broker has access to the full market and more importantly access to new entrants who may be offering extremely competitive terms.
In reality, an independent life insurance broker will have closer relationships with some insurance companies than others. However, there is no doubt it is a benefit to have access to the whole market.
At first glance, you may wonder why anybody would choose a tied insurance broker. Well, if you’re looking for life insurance, you will find that these brokers have extremely strong relationships with a relatively small group of insurance companies.
This can give them a huge benefit. As they are funnelling all of their business across a relatively small group of insurance companies, they can negotiate/demand very competitive terms and rates. There is no reason why a tied insurance broker cannot match the results of an independent broker or even better them.
Yes, if you deal with insurance brokers who are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority. As a consequence, if you were to receive inappropriate advice for your situation, then you do have recourse to complain.
In the event that you were financially impacted by the inappropriate advice, then you may be able to claim compensation. The insurance industry and the activities of insurance brokers are heavily regulated in the UK, which creates a high degree of confidence in the sector.
Yes. It may be that your situation changes in the future and you require additional life insurance cover. Whether you would be able to transfer an additional policy into an existing trust is unclear, and you would need to take legal advice.
You may be able to adjust your existing policy, increasing cover, and therefore all benefits would remain within a pre-existing trust. While many people may be surprised to see others take out more than one life insurance policy, this is common practice.
While we have attempted to cover some of the more frequently asked questions regarding life insurance and the use of trusts, this is a specialist area of finance. If you are considering going down this particular route, it is very important that you take advice at an early stage.
As we touched on above, it can be fairly difficult to make changes to a trust structure and trust rules further down the line. Even legitimate legal challenges may take time, money and significant effort.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Life Insurance brokers. They have already helped thousands of people get the best Life Insurance cover and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
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