Many people think that trusts are highly complicated things that are the preserve of the super-rich. This is incorrect; in fact, many people can benefit from using a trust, or in the jargon ‘writing a life policy under trust’.
Compare life insurance policies with our best buysTrusts are particularly relevant in the following circumstances:
If you have or are considering a level term life insurance or critical illness policy to protect your family.
If your assets would be subject to Inheritance Tax (IHT) at 40% if you were to die (the IHT threshold in 2003/4 was £255,000)
A trust is nothing more than a method of specifying who will benefit from an asset (e.g. a life insurance policy payout) without giving that person or persons (e.g. your partner and/or children) full and immediate control over that asset.
Compare life insurance policies with our best buysAs far as life insurance policies are concerned there are two major benefits to asking your insurance company to ‘write’ your policy in trust, especially as there is normally no charge for this. The first is that beneficiaries of your policy (most likely your partner and/or kids) will not have wait for probate to be resolved before they can get access to the money. This could give them financial peace of mind at a very difficult time.
Probate is the process of settling a deceased person’s affairs and can take several months to complete.
The other massive advantage of ensuring that your policy is written in trust is that it will not be subject to
Inheritance Tax (IHT) at 40%. If your combined assets (minus any debts) are worth more than the IHT threshold (£255,000 in 2003/4), the tax could apply, so ensuring that the payout from a life policy is not included in your estate is normally a good idea for everyone buying life insurance to protect their family. The only person who would not have a possible liability to Inheritance Tax on receipt of policy benefits is a spouse (but the legal definition excludes a common law partner).
If you have both level term life insurance and critical illness cover then you should ensure that your policies are written into a
split trust which will allow you to enjoy the benefit of the critical illness cover without affecting the trust arrangements for your life cover. The insurance company or an independent adviser will be able to advise you on the best course of action.
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