The Importance of writing life insurance policies in to trust & why your policies could be worth 60% of what you think.
First of all, if you are not in the finance world you are probably wondering what a trust is. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.
Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.
So how does this work with an insurance policy and how can it be beneficial to you as an insurance policy holder.
- You control the policy and specify who your beneficiaries are, and who you trust to act on your wishes. This can be really important if you're not married or in a registered civil partnership, as without a trust the money forms part of your estate (how much all your assets are worth) and may not automatically go to who you want. This also can also be an alternative to writing a will, but can also work with your will writing service. If there are children involved it allows them to have financial help they require without getting access to the money. During your life you will also be one of the trustees, so you can work with the other trustees to ensure the money goes to who you intended
- Avoiding Inheritance Tax - When a life policy is not held in trust, it will normally be considered part of your estate, meaning that it can be subject to inheritance tax (40% of any part of your estate over nil rate band which is currently £325,000 as at 1 July 2016). Using a trust should mean that the money paid out from your life insurance will not be part of your estate, increasing the amount of money passed on to your loved ones. This means a house owned outright of £325,000 with an insurance policy of £100,000 essentially pays out £60,000 upon death of the insurance holder.
- 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 grant of probate. The only way grant of probate is avoidable as well is if the estate is valued at less than £15,000. So having the policy in trust could potentially save months and months for the beneficiary.
Can anything be done if you have existing insurance policies that are not written in trust?
Yes you can, you can move the policies to trust at any point. For all the above reasons, policies would normally be advisable to be written in trust.
What is the cost?
Usually there is no added cost by the insurance provider to put policies in to trust.
If you currently have an insurance policy my advice would be to review it alongside your current estate and look at what works best in your current situation. If you don't have an advisor or would like independent help then please get in touch.
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