What you need to know about setting up business protection trusts.

Use the menu to explore everything you may want to know about our trusts - what they are, who can set them up, how they work, who they benefit and more.

You can also view our more detailed guides for share protection and RLPs here.

(Q)

What is a trust?

(A)

A trust is a simple legal arrangement that allows the settlor to gift a life insurance policy to someone else (the beneficiary). It's a great way to ensure that the life insurance is not considered to be a part of the estate when they die, so the beneficiaries won't face the burden of inheritance tax on the life policy.

A trust can also be used to ensure that the life insurance is paid to the right people as part of a business arrangement.

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How do trusts work?

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Setting up a trust means that the settlor gives the policy to the trustees who then legally own the policy and look after it for the benefit of your beneficiaries. The trustees will be responsible for keeping the trust deed and any other documents safe. They make the claim on the policy and ensure that the money goes to the beneficiaries as intended.

There are also inheritance tax benefits, because the value of the policy in the trust is not generally considered to be part of the estate when the life assured dies, leaving more for the beneficiaries.

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Who's involved in a trust?

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There are three key roles in a trust:

  • The settlor - The person giving away the life insurance policy is called the settlor. Once the settlor has put the policy into trust they no longer personally own it, as it's owned by the trust, so they have limited rights to say how it's dealt with. However, the settlor is still responsible for paying the insurance policy premiums and is also usually a trustee, so they do retain some influence on how the trust is managed as a trustee. The settlor chooses the trustees and the beneficiaries and completes the trust form to set up a trust.

  • The trustees - The trustees are the people chosen to look after the trust, make any future claims, and arrange for the money to be paid to the beneficiaries in line with the settlor’s instructions. The settlor, is automatically a trustee. Once the policy is put in trust, the trustees take legal ownership of the trust fund from and must then act in the best interests of all the beneficiaries at all times, and can only do what is allowed in the trust deed. For RLPs this will automatically include the employer who is taking the cover out. For share protection the trustees should include the other business owners.

  • The beneficiaries - These are the people (or person) who are to receive the money from the trust fund. For RLPs this will include spouse or partner, children etc. (A full list is included within the trust form.) There is an option to name specific beneficiaries. For share protection this will be the other business owners.

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What are the main benefits of having a trust?

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There are three key benefits to putting life policies in trust:

  1. Control
    1. RLP - The beneficiaries are the employee’s family (or a charity). This can be really important if they’re not married or in a registered civil partnership, as without a trust the money forms part of the estate (how much all the assets are worth) and may not automatically go to who they want. It's also important when there are children involved, as it can help ensure that they receive some financial support, but do not get full access. During the employee’s life they will also be one of the trustees, so they can work with the other trustees to ensure the money goes to who you intended.
    2. Share protection - The beneficiaries are the other business owners and using a trust ensure that they receive the benefit to enable them to purchase the shares of the business from the estate of the deceased business owner.

  2. Avoiding Inheritance Tax - When a life policy is not held in trust, it will normally be considered part of the estate, meaning that it can be subject to inheritance tax (40% of any part of the estate over nil rate band which is currently £325,000 as at 06/01/2018). Using a trust should mean that the money paid out from the life insurance policy will not be part of the estate of the life assured.

  3. Faster payment of the money - Using a trust should help ensure that the money paid out from your life insurance can be paid to the people of your choice quicker, without the money being held up in the estate waiting for lengthy legal processes, such as gaining a grant of probate.

(Q)

What are the costs of setting up a trust for my life insurance?

(A)

Our trust service is free and simple to use. In just a few easy steps the settlor can ensure that their life insurance money is put in trust, so it goes to who they intended, faster, quicker and without a lengthy legal process. Visit our Select or Complete areas of this tool for more help in setting up the trust.

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Are there disadvantages?

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Once the trust has been created it cannot usually be cancelled before it has served its purpose and the policy cannot be cancelled without the permission of the trustees.

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Do I need to tell you if the trustees personal details change, such as they move home or change their name etc?

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Yes, in order to ensure we can pay the policy proceeds to the trustees quickly and easily, please remember to tell us of any changes to their personal contact details as soon as possible, so our records are up to date.

Just send us a letter confirming the policy number and their new details/address. For a name change we would need to see the Marriage certificate or relevant change of name papers.

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How is a trust set up?

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We can help create a trust in a few easy steps. Our Select tool can be used to help choose which trust could be right, or if you already know then you can go straight to our Complete tool.

The person setting up the trust is called the settlor, and they need to complete a trust deed which they and their trustees have to sign and date and then send to us. There are three parties involved: the settlor, the beneficiaries, and the trustees. The beneficiaries don't have to do anything to set up the trust.

Creating a trust deed on this tool means you can print out a pre-populated form which will need to be signed by the relevant parties and then sent to us. You can also print out a blank form if you prefer. Whichever route you choose you will need to complete any missing information and send it back to us after it has been signed by the relevant parties.

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When does a trust end?

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The trust will usually only end once the policy has ended and there is nothing left in the trust - this could be once a claim has been made and the trustees have distributed all of the insurance money to the beneficiaries. Or it could be if the length of time the policy was taken out for has ended and a claim has not been made.

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Can the trust be cancelled later?

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Once the trust has been set up, it cannot usually be cancelled before it's served its original purpose. This means it's really important that correct trustees are right for the customer.

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When can a trust be set up?

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A RLP or life insurance policy in connection with a share protection policy is placed in trust from the outset of the policy.

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Who controls the trust?

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The people listed as the trustees control the trust. They are the legal owners and they are responsible for managing the trust. They look after the trust fund and following a claim on the policy will make arrangements for the payments to be made to the beneficiaries.

The settlor does not control the trust, though they are usually still responsible for paying the premiums on the policy. The settlor is automatically a trustee so would have a role to play (although on the RLP trust the Principal Employer who is the settlor can opt out of being a trustee – please refer to the Complete section for more information on this).

(Q)

Who pays the premiums on the life insurance policy?

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RLP - For an RLP, the employer is responsible for paying the premiums.

Share Protection - Premiums are usually paid by each business owner.

For both types of policy, if it is cancelled because payments lapse, the trust will also come to an end.

(Q)

Who can cancel the policy?

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The settlor can’t cancel the policy themselves, without the trustees permission and all of the trustees must be in agreement.

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What types of Legal & General trusts are there?

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We have four types of business trusts. RLP, Partnership Protection, Directors Share Protection and LLP Share Protection Trusts.

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What is an RLP trust?

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The RLP trust is a discretionary trust and people who may benefit are listed in the trust deed and include the spouse, children and other family members.

You can add other people the life assured would also like to be potential beneficiaries. However none of the beneficiaries can be sure they will benefit from the trust as it is the trustees who choose which potential beneficiaries will receive any money, how much and when.

For Share protection trusts the beneficiaries are the other owners of the business.

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What types of policies can the trust tool help me with?

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This tool covers RLP and share protection policies only. Share protection policies may also include critical illness cover.

Personal life assurance policies are covered by our personal trust hub.

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Who can be a beneficiary?

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The beneficiary is any person or people that you would like to receive the money from a claim on the policy.

For RLP - The beneficiary is any person or people that the life assured would like to receive the money from a claim on the policy.

For Share Protection - The beneficiaries can be the other business owners only.

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Can the beneficiaries be changed later?

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Yes, but it depends on the type of trust you have.

For RLP - Under a RLP Trust, the trustees have the flexibility to choose from a wide list of people, and can decide when and how much each person will get from the insurance policy money put in trust. The life assured can help the trustees decide by giving the trustees a form of how they would like the money to be shared, this is called the RLP Nomination Form (W13548).

For Share Protection - All new owners should enter into the arrangement by completing a supplemental share purchase agreement. An additional life or life and critical illness policy must also be effected and the appropriate trust deeds completed. Any new owners will automatically be a beneficiary of the existing Legal & General trusts. If an owner leaves the business the share purchase agreement will normally cease to apply to that owner. The policy will automatically revert to the owner.

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What are trustees?

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The trustees are people appointed to be the legal owners of the policy. The trustees will inform us of any claim and receive the insurance money and then pass it on to the beneficiaries.

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How many trustees should there be?

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We usually suggest that a maximum of four but a minimum of three trustees (RLP is a minimum of two) however it's up to the settlor to decide how many trustees they want. The life assured is automatically a trustee on a share protection trust and the Principal Employer is automatically a trustee on the RLP trust unless they have chosen to opt out of being a trustee.

If the Principal Employer has opted out of being a trustee, it’s very important that at least one and preferably two additional trustees are appointed.

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Do trustees have to be UK citizens, or live in the UK?

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Trustees need to be over 18, and it's usually easier if they're UK taxpayers who live in the UK. For non-UK trustees, we suggest taking specialist legal and tax advice on this.

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Who should be picked to be a trustee?

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Choosing who will be a trustee is an important decision and one that should be considered carefully.

For a RLP many people choose a family member or friend, while some choose to appoint a professional trustee (such as a trust company) or a solicitor or an accountant. Or a mix of both. At least two trustees should be picked, and these should be people who can be trusted to act in the best interests of the beneficiaries.

For share protection the trustees are usually the shareholders within the business.

(Q)

Can the trustees be changed later?

(A)

Yes, trustees can change for a number of reasons. A trustee may want to retire, and they can do this if all the trustees agree. To change a trustee, all the trustees must agree including the trustee being changed. Please contact us so we can send the correct forms.

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What if a trustee dies?

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If a trustee dies, the remaining trustees can still carry on but a replacement may be needed.

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What are the trustee's main responsibilities?

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The trustees take legal ownership of the trust fund. Where a business protection policy is the only thing in the trust, they will usually not have much to do until the time comes to make a claim. When making trust decisions they must agree with all of the other trustees and must act in the best interests of the beneficiaries. Trustees are not allowed to profit personally from their role as trustee.

(Q)

How do the trustees make a claim?

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To make a claim, the trustees will need:

  • the trust deed (and any subsequent deeds)
  • the original insurance policy schedule and
  • the death certificate or medical evidence for any terminal or critical illness claims.

They should then contact us to start the claim process.

Our claims team are specially trained by the Samaritans, so you know that your trustees will speak to someone who understands that this may be a difficult time. We make every effort to pay claims quickly.

(Q)

What are the main tax implications of using a trust?

(A)

The main tax which is affected when insurance protection policies are placed in trust is inheritance tax (IHT). Inheritance tax is usually payable on all of the assets that is owned on death -including the house and any life insurance policy payout.

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 the 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 06/01/18

IMPORTANT POINTS TO NOTE

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. However tax considerations can become increasingly important if the money is held in trust for longer and may require professional advice to help with this.

If more information is required about tax, our technical guides provide some further detail.

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Documents and forms

If you would like to know more why not read one of our detailed guides below.

You can also find other useful forms here too.

Relevant Life Plan - Best Practice (Q46451)
PDF : 119kb

Deed to Exclude a Beneficiary or Class of Beneficiaries by the Trustees from a Discretionary Class (W13098)
PDF : 108kb