Putting life insurance into a Trust

We are often asked at Xwills to put life insurance into trust but what does that mean and do we do it?

What is a Trust?

Putting life insurance into a Trust means placing your policy into a legal arrangement.

Think of it like a box, you put the policy inside, someone else looks after the box and then gives the box and it’s contents to your loved one when the time comes.

Why is putting life insurance into a trust a good idea?

1. Avoiding probate. Your loved ones can use the money to pay off any Inheritance Tax
   
   
2. Avoiding Inheritance Tax. The policy is not taxed as it falls outside the Estate. You can use life insurance policies to reduce Inheritance Tax further. This article on how much is inheritance tax explains more.
   
   
3. Naming your beneficiaries. Make sure the people you want to receive the money actually receive it

Sounds great, what are the bad points?

1. You can’t benefit from the policy (apart from certain circumstance, see split trusts below)

2. You pass control of the policy to your trustees?
   
   
3. You cannot change your mind and take the policy out of trust.

How do I put my life insurance policy into a trust?

You should place the policy into a Trust directly with the insurance provider. This should be done ideally at the time you take out the policy or, if not, shortly after either via their online portal or paper forms. Your FCA registered life insurance broker can assist you with this as can Xwills.com

The forms are very confusing, what do they mean?

Yes, we would have to agree, the legal world likes to use some very “old fashioned” terms but let’s try and put them into plain English for you

There are three types of people on Trust forms

1. Settlor – This is the person creating the trust

2. Trustee – This is the person managing the trust

3. Beneficiary – These are the people benefitting from the trust

Or to use our box analogy from earlier

Settlor – Puts the policy in the box

Trustee – Looks after the box

Beneficiary – Gets the box when the settlor passes away

Does it cost anything?

No, it’s absolutely FREE.

There are so many different types, what’s the difference?

Flexible – As the name suggest, this is more flexible, you can change the beneficiaries at a later date

Discretionary – The Trustees have discretion (hence the name) about which beneficiaries to pay. You should include a letter of wishes so that the people you want to benefit do. Read more about Discretionary Trusts in Wills

Survivors – Only available on joint policies. This lets the surviving joint owner receive the benefits of the policy but are held on discretionary trust if they die within 30 days.

Absolute – The opposite to discretionary, the beneficiaries cannot be changed.

Split – A lot of the above trusts will have the term split before the name. This means that if you have terminal illness cover, or critical illness cover you have the right to keep the benefits of the policy if you get a terminal or critical illness (you get to keep the box, although not under good circumstances!)

In Conclusion

Putting Life insurance into a trust is very simple with the right help. It will save you money if your estate qualifies for Inheritance Tax. It will save your loved ones time and money. It’s free

Hold on, why doesn’t everyone put life insurance into a trust then?

To be frank, the only reason can be that they didn’t know about it, who doesn’t love something that helps you and your loved ones, is simple and is FREE