Should your life insurance policy be in trust, and who will benefit from it?

So, you’ve already arranged a life insurance policy, or you may be about to do so. Perhaps you’ve done this to cover a debt such as a mortgage, or to provide a lump sum for your partner or your financial dependents. But should this policy be in trust? Who will get the money and how long will it take?

If you have made a will then it will contain a list of who you wish to receive the benefits of your estate, but before this can be carried out your executors will have to apply for a grant of probate. If you haven’t made a will, any assets will be subject to the Laws of Intestacy which could see them go to the wrong people.

Probate (or confirmation as it is known in Scotland) is a necessary legal process that is required before a deceased’s assets can be distributed in accordance with their will. For those who die intestate (without a will), the process requires an application for letters of administrationwhich is a similar process to probate.

It’s estimated to take on average between 9 and 12 months to obtain a grant of probate during which time the beneficiaries will not have access to any proceeds from the deceased’s estate. This includes life insurance policies unless they have been written in trust.

Why use a trust?

For this example, a trust is a legal arrangement designed to help you ensure that the proceeds from your life insurance policy go to the beneficiaries as you intend. If you don’t have a trust, the money could be used to pay off outstanding debts rather than going to your dependants.

By having a trust in place, this enables you to confirm who should receive the proceeds of the policy and removes the need for probate. If your life insurance is ‘written in trust’, your loved ones can get access to the money more quickly – usually within just a few weeks – after the death certificate is produced, instead of the 9 to 12 months average for probate.

Writing the policy in trust also means any payment on death is outside of your estate for inheritance tax purposes. In fact, many people take out a life insurance policy written in trust specifically to cover the cost of their inheritance tax liability.

Life insurance policies can be written in trust at inception, and some after they have commenced so it’s not too late to do something about it if you have a policy that isn’t in trust.

Inheritance Tax

If, when you die, the value of your estate is valued above £325,000 (if you’re single or divorced) or £650,000 (if you’re married, civil partnership or widowed), everything you own above this threshold will generally be liable to inheritance tax at 40%. Your estate includes all your assets such as your home, savings, possessions and any life insurance payment – unless it is written in trust.

So if, for example, your estate is valued at £525,000, your inheritance tax bill will be £80,000, which is 40% of the £200,000 above the £325,000 threshold. However, you don’t have to pay inheritance tax on life insurance policies which have been written in trust.

Getting the correct advice

Bear in mind there is a lot of jargon associated with trusts – they are complex legal entities after all. When you set up a trust you become ‘the settlor’. You then choose the ‘trustees’ who are responsible for looking after the policy. It is up to them to make sure your beneficiaries receive the money as and when you want them to.  There are many different types of trust, some of which are “set in stone” and others that you can make changes to.

Getting the correct advice is crucial as it is important to set up the correct trust for your individual needs.

The Financial Conduct Authority does not regulate Wills, Trusts or Inheritance Tax Planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.