A Guide to Life Insurance & Trusts

During the course of researching life insurance, you might have seen life insurance trusts mentioned a few times. You might have thought at the time that a trust is too complicated and might not be worth your time. One of the reasons why you might look at getting life insurance is to look after your family and loved ones. Passing away can mean leaving behind some unexpected costs. Your loved ones could need help in order to pay for something like a funeral. A trust could potentially make the process of getting that help your family could need more straightforward. 


What is a trust?


Put simply, a trust is a way of managing things like money, investments, land or buildings. There are a few different kinds of trusts but for the purposes of this article, we are going to discuss trusts in the context of life insurance. Trusts are composed of three different parties. They are the settlor, the trustee and the beneficiary.


The Settlor


This person decides how the trust will be used. A settlor is named in a document called the ‘trust deed’. So if you set up a trust you would be the settlor.


The Trustee


The trustee is the legal owner of assets held in the trust. They are in charge of making sure that everything in the trust goes to the right people according to the wishes of the settlor. The trustee can change but there always needs to be at least one trustee.


The Beneficiary


This is the person or people who will receive the assets held in the trust. It can range from one person to a defined group of people. So in the case of life insurance, this could be your loved ones. 


Why set up a trust?


Currently, in the UK, a life insurance payout is not subject to capital gains tax or income tax. However, they could potentially be subjected to inheritance tax. This form of taxation is levied at 40%. You should bear in mind though, that it will only be applied to your estate if it is valued at more than £325,000. So if your estate value falls below this level there will be no IHT applied. 


Right now you might be thinking that that sounds like a lot of money. However, it might be more common than you think. When you pass away the entirety of your estate is calculated so this includes the value of your home, the value of a life insurance policy and any other possessions you might have. Taking all of these into consideration could potentially bring you closer to that threshold. 


Putting your life insurance into a trust is a way of avoiding Inheritance Tax. When you put your life insurance into a trust you are handing over ownership of the policy to a trustee. You will still be responsible for paying the premiums but the trust itself will be taken into consideration outside of your estate. A trust is also not subject to the probate process so it means that the policy can be distributed quicker. 


How do I set up a trust?


As you might imagine getting a trust set up could require some legal help. That’s why it’s important to get in contact with either a financial advisor or a solicitor in order to get a trust set up properly. 


What are some of the pros and cons of setting up a trust?


Depending on your situation a trust could potentially make things a bit easier for your family should you pass away. It might also sound good that you could save some money on taxes. However, a trust might not be suitable for everyone and there are definitely a few things you should bear in mind. 


Advantages:


  • Once you pass away your life insurance policy will not be subject to inheritance tax. 
  • Getting access to the funds should be relatively quick since they are not subject to the probate process.
  • You know exactly where your payout will go.


Disadvantages:


  • Once the policy has been put into a trust, the legal agreement cannot be subsequently revoked.
  • The trustees may not have your best interests at heart so it’s important to make sure that they do for years to come.


You can trust British Seniors


While it might seem like a lot to take on, a trust could be a way of helping out your loved ones after you’ve passed away. It could give you the tools to help your loved ones at a time when it matters most. At British Seniors, we are here to help you. With our Over 50s Life Insurance, there could be something there to help out those that matter most to you.