Putting your policy into a trust

Wednesday 21 October 2015, 09:01 AM

Philip Pulling
Client Support , LifeSearch

  • Family autumn Large

According to insurer Aegon only 6% of all people in the UK who take out a life insurance policy put it into trust. This is surprising when it could be hugely advantageous and beneficial to the insured person and their loved ones - should the worst case scenario occur. 

The huge benefit and impact of placing a policy into trust can be explained by the two main reasons to take one out in the first place:


1.    Avoiding inheritance-tax
2.    Bypassing probate

1.    Inheritance Tax
Inheritance tax can be enough of a worry on the assets you already possess, let alone on something that is only paid out once you’ve died. According to HM Revenue and Customs more than 5,200 people left their families with an inheritance tax bill on their life insurance pay out in the 2011/2012 tax year, averaging out at £41,000. HMRC also revealed that overall bereaved families are being hit with unnecessary inheritance tax bills totalling up to £216 Million.

How does it work?
Under usual circumstances, the pay out from a life insurance policy would form part of your legal estate. This means that it may therefore be subject to inheritance tax. The threshold, as it stands, per individual for inheritance tax in the UK is £325,000. The tax is payable at 40% on any part of the estate above this level. That’s £4 in every £10 going into the tax man’s pocket.
However, by writing your life insurance policy into trust, in the majority of cases all of the proceeds fro the policy benefits are paid directly to the beneficiaries, as opposed to your legal estate. This money will therefore not be taken into account when the inheritance tax is calculated. This can stop the total value of your legal estate moving above the threshold for inheritance tax, depending on your circumstances.
 
2.    Probate
Probate is a legal process which confirms an executor’s authority to deal with your finances and possessions. So if you left everything to your partner or spouse in your will (not trust), then they would have to get probate granted in order for them to distribute your money, property and all other forms of your estate. The process of probate can take a massive amount of time, even in the case where there is a will in place. In the case of there being no will present (intestacy) it can be dragged on for a lot longer.
The thought of dealing with money issues in the light of a loved one’s death can also be very distressing. It is certainly not the time when someone would want to be dealing with complicated financial issues. In short, a grant of probate is a complex beast and, for the average estate, can take up to 12 months to complete obtain.
 
How does a trust help with probate?

First of all, the insurance provider will be able to pay a claim faster, and will only require a death certificate before paying out. This means, a much shorter wait and no probate. Without the trust in place, the policy holders representatives would have to obtain a grant of representation before they could deal with the policy. So the trust would enable a sense of security for the loved ones left behind, knowing that they automatically have money available to cover the costs of a funeral, the mortgage and even any remaining debts.
 
How much does it cost?
Absolutely nothing. The forms can be supplied by your broker, or even straight from the insurer. Some existing policies can also be transferred into trust.

So are there any catches, clauses or hidden T&Cs?
In a word, no!

What do we do to help you?
Here at LifeSearch we greatly encourage all of our customers to place their policies into trust wherever applicable. We simplify trust forms and take all of the information required on the forms for you. The only work our customers will be doing is signing the forms and getting their beneficiaries and trustees to sign it too… EASY!