What is trust in life insurance policy?

Trust is a legal arrangement where the policyholder transfers the ownership of their life insurance policy to a trustee. The trustee holds the policy on behalf of the beneficiaries who will receive the proceeds of the policy upon the policyholder's death.

Trusts can be used to help ensure that the policy proceeds are distributed according to the policyholder's wishes, and that they are protected from inheritance tax. This is because the policy proceeds held in trust are generally not considered part of the policyholder's estate for inheritance tax purposes.

Trusts can also be used to provide for loved ones who may not be able to manage their finances independently, or to protect the policy proceeds from being used to pay off the policyholder's debts or liabilities.

In the UK, life insurance trusts can be set up in various forms, including bare trusts, discretionary trusts, and interest in possession trusts, among others. The type of trust used will depend on the policyholder's particular needs and circumstances.

It is important to note that setting up a trust can be a complex legal process, and it is always recommended to seek professional advice from a qualified solicitor or financial advisor before doing so.

 In summary:

Placing a life insurance policy into a trust involves transferring ownership of the policy to a trust, which then becomes the beneficiary. This legal arrangement offers several benefits, including protecting the policy proceeds from estate taxes, avoiding probate, and ensuring that the proceeds are distributed according to the trust's terms. It can also help prevent disputes among beneficiaries and protect the policy proceeds from creditors. However, it's important to carefully consider the trust's terms and potential tax and legal implications. If you're unsure about whether a trust is necessary for your situation, it's recommended to speak with a financial advisor, or an attorney experienced in estate planning. You can also find more information on trusts and taxes on the government website at www.gov.uk/trusts-taxes.

Key advantages of trust

A few advantages to setting up a trust are:

  • Control over the distribution of the policy proceeds: By setting up a trust, you can specify exactly how you want the policy proceeds to be distributed among your beneficiaries. This can help ensure that your wishes are carried out and can also prevent disputes among family members over the distribution of the policy proceeds.
  • Protection from inheritance tax: If you leave your life insurance policy to your estate, the policy proceeds may be subject to inheritance tax if your estate exceeds the inheritance tax threshold. However, if you set up a trust, the policy proceeds can be protected from inheritance tax, which can help ensure that your beneficiaries receive the full benefit of the policy.
  • Protection from creditors and other liabilities: If your estate is subject to claims from creditors or other liabilities, the policy proceeds may be used to pay off those claims. However, if the policy proceeds are held in trust, they may be protected from such claims, and can be distributed to your beneficiaries according to the trust terms.
  • Flexibility in distribution of policy proceeds: Depending on the type of trust used, you may be able to provide flexibility in the distribution of the policy proceeds. For example, a discretionary trust can allow the trustee to determine the distribution of the policy proceeds among the beneficiaries based on their individual needs and circumstances.
  • Speedy distribution of policy proceeds: If the policy proceeds are held in trust, they can be distributed to the beneficiaries relatively quickly and without the need for probate. This can provide financial assistance to your beneficiaries when they need it most.