A trust is simply a legal arrangement that allows the settlor (me) to bequeath my life insurance to the beneficiaries.
This is looking like the best idea so far.
If I did nothing, my bank accounts and investments would be immediately frozen. Over-50s and term insurance don’t seem all that great now, and the worst are the funeral plans. Life assurance seems like the best deal – you get money out, it can be accessed outside of the estate (not frozen up), and you can then negotiate with everyone to get a package you actually want – and can pay for.
But before we can go whoop-de-do finally, the people I leave my millions to will get hit with tax, so I need to look at having my life assurance made into a trust.
The current rate of Inheritance Tax (IHT) is 40% of the estate above the nil rate band of £325 000.
An example is a life insurance pay-out of £600 000:-
Take the nil rate band of £325 000 off – (£600,000 – £325,000) to get £275 000.
40% tax on this £275 000 equals a tax bill of £110 000, reducing the pay-out to the family of £490 000.
If I put my life policy in trust, it will not form part of my estate and the beneficiaries will receive ALL of the money quickly without having to wait for a grant of probate.
As the settlor, I decide who will get the pay-out, and even how it is spent. For example, I could insist that any proceeds are used to fund my children’s education.
However, it’s not as simple as it seems; a trust needs THREE trustees minimum, and once a policy is put into trust it is almost impossible to cancel the arrangement.
All three trustees take legal ownership of the trust and look after the deeds which govern it. So I wouldn’t own the trust; it wouldn’t legally be mine.
Okay, I can appoint myself as a trustee (settlors can be trustees too), and it seems reasonable to make my wife a trustee, but now I’m stuck – who the heck can I pick to be the third trustee?
While we are all duty bound to act in the interest of the beneficiaries at all times, I alone have responsibility to pay the premiums for the life policy.
I understand that it is a straightforward process to set a trust up – I just ask the insurance company for the forms. Although a trust option should be offered when taking out a policy, an existing policy can be put into trust later on.
There are various different types of trust, so the matter needs some thought, especially as different types of trust can be treated differently for inheritance tax. The trust itself might even have to pay tax!
- A “Discretionary Trust” is a flexible arrangement that would allow me to add beneficiaries and give guidance to trustees in a “letter of wishes”.
- An “Absolute Trust” is more rigid because the beneficiaries cannot be changed.
The bottom line is that I ought to seek out good legal advice on trusts, and I need to decide on who the third trustee could be.
At the moment, though, it is looking pretty good. I wonder what the premiums are?