Matt Cotter returns to the Mortgage and Protection Podcast to tell us all we need to know about insurance trusts.
What is an Insurance Trust and who is it for?
A trust is like a will for your insurance policy, it’s a legal document which allows you to express your wishes of how you want the benefit to be paid and who it should be paid to. A trust is available to anyone who’s taken out a life or a critical illness plan.
How do Insurance Trusts work?
When you set up a trust, generally, you’re going to see three types of people who play a part in that trust. The settler is the person who’s taken out the life insurance policy, beneficiaries, the people who are going to receive the money, and finally, you also need to nominate trustees. Trustees are people you trust, usually parents or siblings, to ensure that the wishes of your trust are carried out correctly and as you intended them.
Who can be a trustee of a life insurance trust?
The policyholder can be a trustee on their own policy, but you would also want to nominate another trustee if you have a life insurance plan to pay out upon death, as the policyholder is no longer going to be around when that policy needs to be claimed, if it only pays upon death.
If you have a person nominated as your trustee, that trustee would then make sure the money is paid to the person that you wanted it to be, after your death.
Are there different types of trusts?
There are many different types of trusts. There’s trust for assets, trust for insurance and many other types of trust. For example, a joint policy written for a couple with children may need to be a different trust than for someone who’s taken out a policy on their own with no children. There are other factors as well, which determine which trust the person would need, however, as it can get quite complex, it’s best to get some advice from an insurance advisor or a financial adviser about which type of policy to use.
What is the purpose of an Insurance Trust?
An Insurance Trust can have many purposes, but generally it is most commonly used with life insurance. Two main reasons as to why people use a trust and put their policy into trust are to make sure the life insurance policies are paid out quickly, and to the person they wish it to be paid to.
If that policy isn’t in trust, for example, the insurance will form a part of the probate process, which is where one’s estate is distributed. This may mean that the person that you intended to receive the money may not actually receive it.
You might also want to take out a policy into trust to minimise the risk of an inheritance tax liability. If a life insurance policy isn’t written into trust, the amount that you’re insured for will form part of your estate upon death.If the total of that estate is above the tax free threshold allowed, you will be taxed on any amount your estate is valued at over that. Once the policy has been written into trust, it will not form part of your estate upon death, and will therefore be completely exempt from tax.
How do you put an insurance policy in a trust?
We are able to help you write the policy into trust for you here at TMBL. Once you’ve arranged a policy, you would be given the option to write it into trust by the provider. The process is quite simple, and there are just a few forms to complete, where you nominate your chosen trustees and your beneficiaries.
If you already have a life insurance policy and are wondering why you weren’t offered that service at the time, the good news is that it shouldn’t be too late.You should still be able to contact the insurance provider and put that policy into trust at any point.
How long does a trust last and how much does it cost?
The trust itself will last for as long as the policy is enforced. You may take out a life insurance policy to cover you for the next 25 years, and if written into trust, the trust will remain for 25 years until that policy has ended.
It is generally free to put policy into trust. You could incur fees for asset trusts arranged through the solicitors, but if we’re just focusing on insurance trusts, you should be able to get trust forms completely free of charge to express your wishes.
What are the advantages and disadvantages of a trust?
The advantages of a trust are that the benefit will be paid out quickly and to whomever you wish to receive the money, and you may be able to mitigate an inheritance tax liability. There aren’t really any huge disadvantages, as it is just expressing your wishes, however, depending on which trust you’ve made, sometimes they are not amendable.
If you’ve made a right to bear trust, for example, you’re unable to change the trustees, you’re unable to change the beneficiaries, and therefore the only way to change your wishes would be to actually cancel the policy and set up a new one. You could, however, avoid that by using a discretionary trust, which is where you are allowed to change beneficiaries and trustees throughout the term.
Something we can certainly do for our clients is to ensure we discuss their wishes prior to determining which trust is the best option, when setting up the insurance policy. Even policies that have already been arranged, we can point clients in the right direction as to which trust they may want to use. When you take out a trust, it’s important to make sure you get some advice about which trust is right for you.