A life insurance trust is a specific legal entity established to allow the correct and efficient distribution of life insurance assets upon death. When written in trust, any life policy payout will be held in trust rather than becoming part of the deceased’s personal estate.
Key benefits of a trust?
- No inheritance tax.
The payout from life insurance written in trust is not subject to inheritance tax. Thus when a life insurance trust is established the full sum insured is paid to the chosen beneficiaries.
The reason for this is that a trust is outside the personal estate of the deceased and therefore the policy payout is exempt from estate inheritance taxation. In 2009 the inheritance tax threshold in the UK stood at £325,000. Any estate asset value above this figure would be taxed at 40%. - Specify the beneficiaries.
To write life insurance in trust you need to specify the trustees and beneficiaries. The trustees may include yourself, your beneficiaries or anyone you trust, such as your lawyer or accountant. The beneficiaries are those you wish to leave the policy payout to.
Thus, when you pass away the trust will stipulate who the moneys should passed on to, ensuring that the payout reaches its intended destination and without the need for a will. Furthermore, the trustees can also oversee moneys intended for children under the age of 18 years. If you have debts the moneys will be paid directly to your chosen beneficiaries and not to creditors. - Speed of payment.
If the policy is written in trust then there is no need to go through the legal probate court process, which can be lengthy, especially if no will exists. Avoiding the legal probate process also saves on its associated costs. It is also important to note that inheritance tax must be paid within six months of the policyholders death, so the speedy life policy payout can be used to help meet the inheritance tax bill.
Will a life insurance trust cost anything?
There are no additional charges to write a life insurance trust. A trust can be set-up when you take out your life policy. There is an additional form that needs to be completed which your insurance broker can assist you with for free.
Do I need a trust for a joint life policy?
No. In the event of the death of one of the policyholders in a joint life policy the payout will automatically go to the other policyholder. The payout will therefore remain outside of the personal estate of the deceased and not be subject to estate inheritance tax.
Example: Life policy written in trust versus not written in trust
- Firstly, without an established life insurance trust the policyholders family would have to go through the probate court process to establish the appropriate beneficiaries, which can take well over six months and longer where no will is in place.
- Suppose the value of the deceased estate totals £325,000 (2009-2010) without the life policy payout and is thus equal to the estate inheritance tax threshold. At this point there is no inheritance tax to be paid. Now suppose that the insurer pays the life policy sum insured of say £250,000.
As the life policy was not written into trust it adds to the estate of the deceased, now totalling £575,000. An inheritance tax liability now exists of 40% times £250,000 or £100,000. Without even taking into account probate costs the deceased’s family are already £100,000 worse off simply because the life policy was not written into trust.
If you would like any trust or life insurance advice please do not hesitate to get in contact, we are here to help.
For details on life insurance and the regulation of the industry visit the Associate of British Insurers or Money Made Clear website from the Financial Services Authority.
