When can a trust be set up?
A Relevant Life Plan, or life insurance policy in connection with Share Protection, is placed in Trust from the outset of the policy.
A personal life insurance policy can be put into Trust when initially setting up the policy, or at any time after that (via paper). A Trust can only be set up by the policy holder.
If the policy has had a transfer of ownership (for example, providing it as security for a loan, or to help pay for a funeral where the policy has funeral cover) it may mean the Trust cannot be used.
How many trustees should there be?
We recommend a minimum of two additional trustees in addition to the settlor. The life or lives insured are automatically a trustee.
As for a Relevant Life Plan trust, the principle employer is automatically a trustee
Who can be a trustee?
A trustee can be someone your customer trusts to handle the money and distribute to the beneficiaries as per the instructions documented in the trust. This will usually be a close relative or friend. It can also be a professional like a solicitor but they may charge for their services.
A trustee must be over 18, and it’s usually easier if they’re UK taxpayers which live in the UK. For non- UK trustees we suggest taking specialist legal and tax advice on this.
When does a Trust end?
A Trust ends once a claim has been made and the trustees have distributed all of the insurance money to the beneficiaries, if the policy has reached the end of its term without a claim being made, or if the policy is cancelled.
Who controls the Trust?
The trustees control the Trust. They are the legal owners and are responsible for managing the trust. It’s their role to look after the trust fund, and following a claim on the policy, make arrangements for the payments to be made to the beneficiaries.
The beneficiaries do not control the Trust, although in some circumstances they can force trustees to act. For example, with an Absolute Trust, if all the beneficiaries are over 18 years old and of sound mind, they can act together to give directions to the trustees.
Who pays the premiums on the life insurance policy?
For personal life insurance the settlor (person giving away their life insurance) is responsible for paying the insurance premiums.
For Relevant Life Plans the employer is responsible for paying the premiums. For share holder protection, the premiums are either paid by the business or business owners.
Who can cancel the policy?
The settlor can cancel the policy with permission from the trustees. If the settlor stops paying premiums the policy will lapse and the trust will come to an end.
For online trusts, the settlor has the power to cancel the policy without the permission of the trustees (excluding RLP and share protection).
Can the beneficiaries be changed later?
Most of the Trusts we provide are flexible and the beneficiaries can be changed if your customers’ circumstances change too, such as having more children or grandchildren, or a change in business owners or partners. The only one that can’t be changed is the Absolute Trust.
What if a trustee dies?
If a trustee dies, the remaining trustees can still carry on, but a replacement may be needed.
How do the trustees make a claim?
To make a claim, the trustees will need:
- the trust document (and any subsequent deeds)
- the original insurance policy document and
- the death certificate or medical evidence for any terminal or critical illness claims
They should then contact us to start the claim process.
What’s the main tax advantage of using a trust?
The main tax which is affected when insurance protection policies are placed in a trust is inheritance tax (IHT). IHT is usually payable on all of the assets that you own when you die, including your house and any life insurance policy proceeds.
The potential IHT bill can be reduced by using a trust for the life insurance policy. Once a policy is placed in trust, it will not usually form part of the estate. This means that the money which is subject to inheritance tax on death may be less, thereby increasing the amount of money that the loved ones receive after death.
Everybody has a nil rate band currently* £325,000, which means that IHT would not be payable, if your estate is worth less than this. In addition, there are some exemptions which can help to reduce the value of the estate. If you are unsure of your IHT position, you may wish to take specialist advice.
*As at 1 July 2018
Are there any additional tax implications to consider?
It's important to understand that in some cases, the Trust itself might have to pay tax. However, in the majority of cases, there are unlikely to be significant tax considerations, before the life policy pays out and also after a claim, as long as the money is paid out of the trust immediately.
Remember, tax considerations can become increasingly important if the money is held in a Trust for longer and you might wish to seek professional advice to help with this.
The various types of Trust are treated differently for Inheritance Tax purposes. Discretionary, Survivors Discretionary and Flexible Trusts are all types of Relevant Plan Trusts (RPT) and are largely treated in the same way. Absolute Trusts are treated differently.
If you need more information about tax, our technical guides provide some further detail, or you may wish to seek specialist advice.