Placing your life insurance policy in trust is a practical step to ensure your loved ones receive the full benefit of your policy, free from unnecessary tax and delays. When a policy is written in trust, it is held outside your estate, so the payout is usually not subject to Inheritance Tax (IHT) and can be paid directly to your chosen beneficiaries, often much faster than if it had to go through probate.

What is a Life Insurance Trust?

A life insurance trust is a legal arrangement where your policy is owned by trustees for the benefit of your chosen beneficiaries. This means the proceeds are not counted as part of your estate for IHT purposes and are paid out according to the trust’s terms, not your will.

Benefits of Life Insurance Trusts

• Inheritance Tax savings: The payout is outside your estate, so it is usually free from IHT, which can save your family a significant sum.

• Faster access to funds: Beneficiaries can receive the money quickly, as the payout does not have to wait for probate.

• Control and flexibility: You decide who receives the money and, with some trusts, when and how it is distributed.

• Protection for vulnerable beneficiaries: Trusts can be structured to protect young or vulnerable beneficiaries, or to stagger payments over time.

Types of Trusts

• Discretionary trusts: Trustees have the power to decide how and when to distribute the money among a group of potential beneficiaries. This offers flexibility if circumstances change.

• Bare trusts: The beneficiary has an absolute right to the proceeds once they reach adulthood. The trustees simply hold the money until then.

• Split trusts: These can combine features of both, for example, allowing you to retain some benefits (such as critical illness cover) while the life cover is held for beneficiaries.

Setting Up a Trust

To set up a life insurance trust, you’ll need to:

• Choose your trustees—people you trust to manage the money responsibly.

• Decide who your beneficiaries will be.

• Complete a trust deed, which is the legal document setting out the terms of the trust.

• Assign the policy to the trustees, so they become the legal owners.

Key Considerations

• Trusts can be complex: Make sure you understand the tax implications and the responsibilities of trustees.

• Review regularly: Update your trust if your family circumstances change, such as marriage, divorce, or the birth of a child.

• Choose trustees carefully: Trustees have important duties, so pick people who are reliable and understand your wishes.

Life insurance trusts can offer real peace of mind and significant tax savings, but they must be set up and managed correctly to deliver the benefits you want.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances.