The Benefits of Putting a Life Insurance Policy in Trust

Thinking about the future and what happens to your loved ones after you’re gone can be a difficult subject to contemplate. However, ensuring the financial well-being of your family is a crucial responsibility. Life insurance or Level Term Assurance can provide a much-needed cash lump sum to your beneficiaries, offering financial support during challenging times.

But, putting your life insurance policy in trust can provide even more control and benefits. Here, we explore the advantages of putting your life insurance in trust and help you understand whether it’s the right option for you…

What is a Trust?

A trust is a legal arrangement that allows you to designate specific beneficiaries who will receive the benefits of your assets when you pass away. In the context of life insurance, this means creating a trust to manage the payout from your life insurance policy. The trustees will oversee the distribution of the funds according to your instructions, providing you with greater control over who benefits from the payout.

Should I Put My Life Insurance in Trust?

Here’s exactly why you should consider putting a life insurance policy in trust.

Control Over Beneficiaries and Management

By placing your life insurance policy in trust, you have the opportunity to define who will receive the benefits and manage the funds. This level of control ensures that your intentions are upheld, and the money is used in the manner you envision, supporting your loved ones as you desire.

Speedy Payout

The process of probate, where assets are divided after your death, can be time-consuming, often taking months to complete. However, if your life insurance policy is in trust, the payout is usually expedited. In most cases, the insurance company only require your death certificate and a completed claim form to initiate the payment. This quicker access to funds can be immensely helpful for your beneficiaries during challenging times.

Tax Efficiency

Putting your life insurance policy in trust can have significant tax benefits. In the UK, inheritance tax may apply if your total estate, including your life insurance, exceeds £325,000. Any amount above this threshold could incur a 40% tax bill.

Placing the life insurance policy in trust means it is legally owned by the trustees and not considered part of your estate. As a result, it does not count towards the £325,000 threshold, ensuring that your loved ones receive the full payout without any inheritance tax deductions.

Downsides of Setting Up a Trust:

While putting your life insurance policy in trust offers numerous advantages, it’s essential to consider potential downsides before proceeding. Once a trust is set up, it becomes a legal arrangement that cannot be easily cancelled or reversed. You are essentially transferring legal ownership of your life insurance policy to the trustees, and this decision is permanent.

Seeking independent legal and financial advice before establishing a trust is crucial to understand the implications fully.

Types of Trusts:

There are several types of trusts, each offering varying degrees of flexibility. The right type of trust for you depends on the specifics of your life insurance policy and your desired beneficiaries. For instance:

A ‘flexible’ trust allows you to name multiple potential beneficiaries and add more as circumstances change, such as the birth of grandchildren after the trust is established.

An ‘absolute’ or ‘bare’ trust does not permit changes to beneficiaries once established.

A ‘survivor trust’ may be suitable for joint life insurance policies, where the trustees pay the proceeds to your surviving partner if they outlive you by a number of days, for example, 30 days.

How to Put Your Life Insurance in Trust:

Before deciding to put your life insurance policy in trust, seek independent financial and legal advice to determine if it aligns with your needs and goals. Once you are ready to proceed, the process is relatively straightforward and can be done at any time. When buying a new life insurance policy, have an idea of who you want as trustees before starting the process. For existing policies, you may require assistance from a financial adviser.

Putting your life insurance policy in trust offers substantial benefits, such as increased control over beneficiaries, a speedier payout, and potential tax savings. However, it’s essential to carefully consider the legal and financial implications before making this decision. Seek professional advice to ensure that your choice aligns with your unique circumstances and financial goals.

Get in Touch

At Spectrum Financial Advice, our team of experts are dedicated to helping you make well-informed decisions to protect the future of your loved ones and secure your financial legacy.

To speak with an expert, please get in touch with us today.