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Trusts

No one ever takes out life insurance expecting to make a claim, but if the worst happens you want to be sure the money goes to those who need it – as quickly as possible.

Taking a single life insurance policy gives you the piece of mind that those financially dependent on you will be secure, and using a trust makes sure they get it.

Please note that the Financial Services Authority do not regulate trusts.

What is a Trust?

A trust is simply a piece of administration that ensures that on your death, the proceeds from your life insurance policy reach the person you intend. 

A trust is relatively easy to set up, and is simply a form to be completed in which you name the beneficiary of the policy and assign a trustee. This form is then sent on to the life insurance company with which your insurance policy is held and they help ensure the payout reaches the beneficiary stated on the trust document.

If the worst should happen and you die, the life assurance paid out forms part of your estate.   This means you could be subject to Inheritance Tax. In many cases it's possible to mitigate this by writing the policy in trust, as long as this is done at the time the life insurance policy is taken out.

Do this and the life insurance pays out directly to your beneficiaries, so it never becomes part of your estate, mitigating inheritance tax and speeding up the payout, by avoiding probate.

See our trust document library for a range of documents for you to complete at home for many of our top insurers.

Do I need a trust?

You only need to complete a trust document if you are taking out a single life insurance policy.  A joint policy will automatically pay out to the surviving person named on the joint policy.  Having said this, some insurers such as AXA offer a survivor trust – this means that should both people on the policy die a beneficiary can be assigned, but not every insurance company offers this.

If you take out a single life policy you need to complete a trust form to ensure the money paid out in the event your death reaches the people/person you wish in a swift and tax efficient manner.  These people are the beneficiaries. 

If a trust document is not completed at the time the policy is taken out, in the event of your death the proceeds from your life insurance policy will become part of your estate and therefore subject to Inheritance Tax.  But don’t worry, you can write a policy in trust at any time.

Your estate in the event of death

The scenarios below show what happens when someone dies:

Who gets my estate?

Amy is single, has no children and has a life or earlier critical illness policy.  If a claim is made for critical illness then the benefit is paid to Amy, but in the event of death the money would pass to her parents. 
This would still have to go though probate (which can take months or even years in complex cases) and could be subject to inheritance tax depending on the amount.

Placing the policy in trust would ensure the money passes immediately, avoiding probate & inheritance tax, to the intended beneficiaries.

Who gets my estate?

Dan and Susan are partners with no dependent children. They have bought their first home together and have a mortgage on it. To ensure they are protected should anything happen to one of them they have a joint life insurance policy in place to cover the mortgage debt. In the event of death the benefit would automatically pass to the partner – so in this case there is no need to use a trust. Because the policy is jointly owned there would be no probate or tax issues.

Who gets my estate?

James & Vicky are married and have 2 children. Vicky is a full time mum, whilst James is the main income earner. James has taken out a single life insurance policy to make sure Vicky and the children are financially secure should he die prematurely. Even though they are married James’s policy benefit would still have to go through probate before the money could be available to Vicky and the children. Using a trust would avoid this ensuring the money passed immediately to Vicky at a time when money is the last thing she needs to worry about.

Inheritance Tax?

Not everyone pays Inheritance Tax.  Its is only due if your estate- including any assets held in trusts and gifts made within seven years of death – is valued over the current Inheritance Tax threshold (325,000* in 2012-2013).  The tax is payable at 40 per cent on the amount over this threshold.

Since October 2007, married couples and registered civil partners can effectively increase their threshold on their estate when the second partner dies – to as much as £650,000* in 2012-2013. 

If you are considering a single policy, you need to complete a trust document to ensure proceeds from you policy in the event of your death reach the correct people directly while avoiding Inheritance Tax liability.

You can find most companies trust schedules in our trust library

* Taxation levels and basis of reliefs are dependent on current legislation, individual circumstances are not guaranteed and may be subject to change

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Hint

See our library for copies of trust schedule for most of our trusted providers - you can fill these in and send them on to the company to be registered.