Luke Ashworth

What is a trust?

A trust is a way of putting something valuable (an asset) aside to benefit others - in this case, the value of your life insurance policy.

The trust stops the money being used for any other purpose and ensures it goes to the people you want when you die. These people are known as the Beneficiaries.A trust means your money goes to the people you intended. For example, if you owed money when you died, a trust could mean the money paid out under a term insurance policy would go to your loved ones not your creditors. Trusts are set up for a variety of reasons:

• If the named Beneficiaries are to be minor children who are not old enough to deal with the property themselves, or if it was a class of beneficiaries such as grandchildren some of which may not have been born yet then a trust would be established.
• A trust would also be used to provide ongoing care for someone who is mentally disabled and could not handle their finances on their own.
• If you do not wish young beneficiaries to receive the money before the age of 18 a trust could be set up for this reason
• Trusts can also be used to mitigate tax.

When you die, the courts have to give permission for assets in your estate to be given to your beneficiaries. This takes time, and if you die before making a will it can take even longer sometimes up to six months and it incurs costs. However, trustees don't have to wait for courts so your life insurance payment can be made as soon as possible.

If you left behind children under 18 when you died, trustees could use the trust to support your children. Once your children have turned 18 they can have full access to the money remaining in the trust.

When property such as a term insurance policy is placed under trust, Trustees are appointed.  These people are the legal guardians of the property, and they have to administer the property for the benefit of the Beneficiaries under the trust rules and specific powers.  These specific powers may be for example to pay for further education.

The Settlor is the person who pays the premiums for the life policy.  When the Settlor dies the money paid out by the policy is managed by the trustees, and can be distributed in accordance to the trust rules and specific powers.

A trust deed is drawn up and the policy provider is informed that the policy is the property of a trust and the trustees are then registered as the legal owners. Once a trust deed has been signed the policy cannot be removed from that trust, and the term insurance policy is no longer the Settlor’s property.  The policy provider can provide trust documentation but you should seek legal advice to ensure their trust wording is suitable for your requirements.

On the death of the Settlor it is the Trustees that have to claim the sum assured from the policy provider as they hold the life policy.

Trustees must ensure that they manage the trust property and they must be diligent to avoid unnecessary loss as they could be liable to the beneficiaries for any breach in this duty.

If a policy is not put into trust the money paid out by a life insurance policy will form part of your estate. If the value of the estate is over the inheritance tax barrier (which was £285,000 in 2006/2007) then the amount over the barrier would be taxed at 40% (2006/2007). Inheritance tax is exempt for husband, wife and civil partners domiciled in the UK.

Settlors may use a trust to reduce inheritance tax liability on the Settlors death; property put into trust during the life of the Settlor may reduce the amount of tax payble.

As with most things trusts can be useful, however expert advice should be taken if you are considering a setting up a trust.

Article Tags: Term Insurance Policy, Money Paid, Term Insurance, Insurance Policy, Policy Provider

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