By placing a policy in a trust, the policyholder transfers ownership of the policy to the trust. Should the policyholder die, the proceeds generally do not form part of the estate.
A trust, in its simplest terms is a legal instrument that allows someone to give away assets in an efficient way. Whilst a trust will often be used to make gifts of shares, cash, land and bricks-and-mortar property it can also be used to hold a life assurance policy for the benefit of beneficiaries nominated by the policyholder. We will focus on the life assurance trust in this FAQ guide.
The benefit of placing a life assurance policy in a trust is that it can avoid probate delays. Probate is the legal process that determines how a dead person’s estate is distributed. The probate process, on average, takes between nine and twelve months to complete. By placing a life assurance policy in a trust, the policyholder has transferred ownership to the trust. Because the trust now owns the policy there is no ownership issue to be decided by probate. This means the life assurance provider can pay the proceeds quickly to the trustees, who will pass the money to the nominated beneficiaries.
The key feature of a trust is that you no longer own the asset held in the trust. This means that should you die the proceeds of the policy do not generally form part of your estate.
If you are interested in setting up a trust for your life assurance policy, speak to an expert adviser at Mortgage Advice Bureau and they can talk you through the process.
Trust entities are the different roles that are involved in creating and managing a trust. There are three entities involved in creating a trust.
The creator of the trust and the life insurance policyholder.
Administrators of the trust; the settlor is automatically a trustee, but it is customary to appoint at least one further trustee.
The person or persons that the policyholder chooses to benefit from the proceeds of the policy.
As the policyholder, when you place the policy in a trust you become the settlor. Once you’ve created a trust, you cannot cancel it, although it will end if the policy ends; for example, because you stop paying premiums.
As settlor, you are automatically a trustee, but it makes sense to nominate additional trustees. If you die leaving no additional trustees, the administration of the trust will pass to whoever is administering your estate. Inevitably this will cause delays, removing one of the advantages of you placing your policy in trust in the first place. It is a good idea to choose trustees who are both UK resident and easy to contact. You can replace, remove or appoint further trustees at any time. However, bear in mind that too many trustees can hinder rather than help.
In a trust it is usual to have more than one trustee. As settlor, the policyholder is automatically a trustee but it is sensible to appoint additional trustees. It is usual to appoint at least two trustees at outset. You can retire as a trustee if you no longer wish to continue. If at any time only one trustee remains, a further trustee should be appointed.
You can nominate any person or charity as a potential beneficiary. Your nominated beneficiaries have no legal interest in the trust, only what’s known as an equitable interest. This means the life assurance provider only ever takes instructions from the trustees. You can change your nominated beneficiaries whenever, and as often as you like. Your latest written nomination of beneficiaries overrides any earlier nominations.
Modern trusts can be very flexible which means that the policy holder can add or remove beneficiaries from the trust and vary the percentage distribution amongst the various beneficiaries. The settlor can also specify the minimum age that the beneficiaries receive their share, usually age 18.
You and any other trustees are the legal owners of the policy. Therefore, you are responsible for administering the trust and its assets. This means deciding who benefits from any funds in the trust and when.
When a life assurance policy is the only asset of the trust, funds will only ever exist if the policyholder dies. If this happens, your duties as a trustee usually extend to nothing more than passing on the policy proceeds to the trust’s nominated beneficiaries. The life assurance provider will require written instructions from all the trustees before paying the proceeds.
However, if any of the beneficiaries are young children, the proceeds stay in the trust until they are 18. In this event, you and any other trustees become responsible for investing the trust assets until the trust can distribute the assets to the beneficiaries. Certain further trustee duties exist under law.
To be a trustee, you don’t need any special qualifications. You just need to be over 18 and of sound mind.
Although you don’t need any special skills or knowledge to perform your role as trustee, you must ensure, when required, that you invest the trust assets appropriately. This will probably involve seeking professional investment advice.
The settlor will usually write an expression of wish letter which details the fund distribution to the beneficiaries whilst they are under 18. This does not form part of the official trust but it helps trustees to understand the wishes of the settlor.
You must administer the trust assets for the benefit of all beneficiaries. You must not favour one beneficiary over another unless the trust expressly allows you to do so.
The trustee will act upon the settlor's wishes which could mean monthly pay outs for beneficiaries or one off payments for items such as a first car. But, at the age of 18, unless otherwise stated in the trust, a beneficiary is free to take their share of the funds out of trust.
As a non-professional trustee, the law prevents you from profiting personally from acting as a trustee. This means you cannot receive any form of payment for your activities as a trustee.
If you have any questions about trusts or life insurance policies, get in touch with Mortgage Advice Bureau.
Financial Conduct Authority (FCA) does not regulate Trusts.
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