Some people might not realise but the money that you leave to your beneficiaries from a life insurance policy could be subject to inheritance tax as it is included in the overall value of your estate after you die.
One way of avoiding this is to place your life insurance policy into a trust, which allows you to ‘gift’ your life insurance policy to your beneficiaries and therefore avoid any inheritance tax implications.
How does a trust work?
Setting up a trust means that your policy is given to a trustee who will then legally own your policy, and look after it until you die.
It is still your responsibility to pay your regular insurance premiums, however the trustee will be responsible for keeping the policy deed safe. Upon your death, the trustee will make the claim on your policy and will ensure that all monies are transferred to your beneficiaries as you intended.
What are the advantages of using a trust for my life insurance?
Avoidance of Inheritance Tax
Trust life insurance is outside the boundaries of your estate for inheritance tax purposes and therefore will be able to pass tax-free to your beneficiaries.
No need for Probate
Awaiting Probate can be a frustrating time for beneficiaries of your estate and can often be a time-consuming process. Have a life insurance policy in trust means that you don’t need to wait to claim – any payouts due to your beneficiaries should be paid out promptly upon your death
Control over who gets paid
With a trust, you can specify who your beneficiaries are, and who you trust to act on your wishes. This may be important to you if you are in a long-term relationship, but aren’t actually married as the estate may not automatically pass to who you want it to.
You may also use to offer your children a degree of financial support, even if they do not get full access at this time. Whilst you are alive, you are one of the trustees of your policy, so you can liaise with the other trustees to make sure that the money will go to the right people upon your death.
And the disadvantages?
Once you have placed your life insurance policy in trust, it can’t normally be taken out of trust so you should consider this option carefully before you decide it’s the right thing to do.
As the policy owner, you can’t benefit from the policy yourself – this isn’t a problem if it’s a sole policy as you won’t be around to benefit anyway, however it could cause complications if you place a joint life insurance policy in trust.
Choosing the right policy
As with any major financial decision it’s always wise to seek independent financial advice before taking out a life insurance policy in trust.
A life insurance adviser can help you to search the market for you and find the right type of policy for you whether it is a standard life insurance policy you need or you’d like to consider placing it in trust. They can look at the advantages and disadvantages of both types of policy so you have all the information you need to make the right decision.
Our trained expert advisers have access to the UK’s leading lenders and using their knowledge and skills will place you with the most suitable leader and product for your needs.