Life insurance is a way of creating a financial safety net to provide for your family in the event of your death.
When you have a life insurance policy in place, a fast payout of a lump sum or regular income becomes available to your beneficiaries upon your death. This can alleviate the stress of having to deal with the financial fallout of losing you, particularly if you are the main breadwinner of your household.
However, one thing that many people don’t realise is that without careful planning, that lump sum payout could incur the 40% inheritance tax. This means your beneficiaries would lose close to half the funds that you faithfully built up over a number of years. For this reason, many people choose to place their life insurance in trust. There are various benefits to this, with the main one being that the proceeds will not be considered part of your estate and thus will not be subject to inheritance tax.
Think Plutus has composed this guide to help you understand the ins and outs of placing life insurance in trust. As always, get in touch if you have any questions or would like to start the process of taking out life insurance yourself.
Why write your life insurance property in trust?
When you place your life insurance in a trust you enter a legal arrangement wherein a trustee is nominated to ensure the assets that your life insurance policy pays out are distributed in accordance with your wishes. It can be useful to put your life insurance in trust if you want your assets to be protected – if your estate is valued at a total higher than £325,000 (£650,000 if you are married) then all assets beyond that threshold will incur inheritance tax charged at 40%.
If you write your life insurance in trust your hard-earned money can be saved for your beneficiaries. When written in trust, your life insurance payout is placed outside of your estate, meaning the taxman cannot touch it.
How does a life insurance trust work?
It enables your beneficiaries to gain access to the funds swiftly since the payout is often made within weeks of your death.
Think Plutus knows that you want to leave as much money as possible to your loved ones when you die, and a life insurance policy in trust could help with this. If you want to learn the full details of the advantages of this option, speak to one of our advisers and they’ll talk you through it. We are regulated by the Financial Conduct Authority, which means we always have your best interests at heart.
Is it wise to put your life insurance into a trust?
Placing your life insurance in trust is not a small decision and you should know that it is usually irreversible. Before you commit to a decision, you must be sure that you understand the long-term implications. An expert adviser like those at Think Plutus can help with this before you make such a far-reaching decision.
Here are some of the pros and cons:
Pros of life insurance in trust
- The funds will be swiftly paid out to your chosen beneficiaries.
- The proceeds will not be part of your estate when you die, helping minimise your inheritance tax liability.
- You can be confident that your payout will be distributed precisely how you want it to be.
Cons of life insurance in trust
- Once the decision is made, there is no going back. Once a trust agreement is signed and confirmed you cannot reverse your decision.
- You surrender full control over your life insurance policy if you place it in a trust.
What are the steps to having my life insurance placed into trust?
A trust is a legal arrangement whereby your money or assets can be transferred to the person/persons of your choosing. To place your life insurance in trust, you’ll need to select your trustees, find the right insurance provider and make a decision about whether you wish to place your insurance policy in the trust immediately or assign it at a later date.
In most cases, there is no reversing a decision to place your assets in a trust. If you change your mind about the arrangement down the line, there is no way of undoing it. This is why you must ensure that you know all the facts and consider every detail before making a decision about whether or not to place your life insurance into a trust.
Contact Think Plutus today and one of our expert advisers will be able to answer every question you have and guide you through the process of making this decision.
How to set up a trust for life insurance
To establish a trust, the following participants need to be selected.
- The settler/donor – this is the person whose assets are to be placed into trust.
- The trustee – this is the person or organisation nominated to be the legal guardian of the assets in trust. This is often someone that the settler knows well and trusts and, of course, is likely to live longer than the donor.
- The beneficiary – the person or people who will be the recipients of the proceeds of the trust if the settler passes away.
Once you’ve decided who all the participants in the trust will be, you need to perform a search of the market to find the right provider with the best rates and terms for your needs. Think Plutus can help with this, bringing expert advice and whole-of-market access to the table so that you can feel confident of finding the right deal.
The assets that are placed in trust – the ‘trust property’ – are administered by the ‘trustees’. This person (or group of people) is legally and morally bound to manage the assets in the trust in a responsible and productive way. They are obliged to act purely in the interests of the trust’s beneficiaries.
As a general rule, a trustee can be anyone who is over 18, has no criminal record and has never been declared bankrupt.
Getting a life insurance trust deed
To have your life insurance placed into trust, you will need a trust deed. This is a legally binding document that contains every party that makes up the trust, the terms of the trust, and the names of all the beneficiaries.
The trust deed is the legal guarantee that the money from your life insurance payout will be distributed precisely how you intended. It acts in the same way as a will for the assets that are placed in the trust, thereby eliminating the need for probate. Making a will for other parts of your estate will probably be beneficial as well. There is specialist help available to assist in all these areas.
Having a life insurance trust deed prepared is a legal process which confirms the authority of the trust to handle your life insurance payout in the event of your death.
Life insurance and wills
When you include assets in your will, there has to be confirmation from probate before they can be distributed to beneficiaries. With a life insurance trust deed acting as the will for the assets you place into the trust, the funds can be transferred to your beneficiaries without having to go through any kind of probate, meaning the process happens quickly.
All that’s needed for a life insurance policy written into trust to be released is a death certificate. This may make it easier for your loved ones to receive the funds, eliminating any additional stress or frustration that they really don’t need when they are grieving.
What is an irrevocable life insurance trust?
Essentially, this means a life insurance trust that can never be amended in any way. It is often set up to have funds in place for a specific purpose, such as covering the inheritance tax bill on your estate.
Placing life insurance in trust in the UK
The rates, terms and conditions of a life insurance policy will vary depending on the provider in question. This means that careful and thorough research is required to ensure you secure the policy that best meets your needs. To have your life insurance policy written into trust in the UK, a full market search must be performed to obtain accurate quotes from UK insurers. This will help you understand how much your regular premiums will be to get the payout your family will need when you die.
Keep in mind that once you have set up a trust for your life insurance policy, it will probably not be possible to change or amend your plans later on. The trustees gain control over your insurance funds and have a permanent legal obligation to fulfil the wishes written in the trust deed. This is why it is of vital importance to get the right deal and consider all the financial implications.
Think Plutus can obtain accurate life insurance quotes from the full market of policies to ensure you find the right deal for you. We can also advise throughout the process of setting up the trust to ensure you make the best decisions for your needs. Contact us for a free, no-obligation consultation to talk it through with an expert adviser.
Restricted property trust life insurance
Restricted Property Trust (RPT) life insurance is an option for business owners to consider which may help reduce their income tax whilst growing their assets. The RPT essentially purchases the life insurance policy on the participant’s behalf and the participant nominates the beneficiaries at the outset.
Since the life insurance policy is owned by the trust, tax-deferred growth is made possible. Furthermore, the annual payments made to an RPT are fully tax-deductible to an employer and partially tax-deductible to a participant. Any taxes that are owed will be paid at a later date when funds are withdrawn from the insurance policy.
For detailed information about setting up RPT life insurance, including the tax advantages for your specific circumstances, contact Think Plutus. Our specialist advisers will be able to walk you through the available options.
Speak to an expert about placing your life insurance in trust
There can be some significant advantages of writing a life insurance policy in trust. It can help preserve your wealth and the lifestyle your loved ones are used to in the event of your death. If you are setting up a trust to place your life insurance in, it is absolutely essential that you select the right insurer and trustees to ensure the funds you accumulate end up going exactly where you intend.
The best way to make the right decisions at every stage is to work with an expert adviser who can find the ideal insurance policy for your circumstances. If you have any questions about the process of writing life insurance into a trust, contact Think Plutus today and speak to one of our expert advisers.
To get everything right when putting life insurance into trust, Think Plutus.