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Pros and cons of putting a policy into a trust

This article is part of
Guide to Writing Insurance Policies in Trust

Putting a protection policy in trust can ensure the death benefit is paid to the right people, as the trustees have a legal obligation under the trust to use the proceeds for the sole benefit of the named beneficiaries.

If your client dies and their plan is not written in trust, Ian Smart, head of product development and technical support at Bright Grey and Scottish Provident, says their personal representatives will need to obtain the appropriate grant of representation before they can deal with the plan.

This process is known as ‘probate’ in England, Wales and Northern Ireland, or ‘confirmation’ in Scotland, and can take several months.

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By putting your client’s plan in trust, he says clients can avoid the need for probate or confirmation, provided there is at least one surviving trustee following your client’s death. Because the trustees are the legal owners of the plan, they can deal with it immediately and make sure the funds are distributed as soon as possible.

Inheritance tax is currently payable at a rate of 40 per cent on any part of an estate valued at more than £325,000 (2013 to 2014).

When your client dies, Mr Smart says any money paid out from their protection plan is added to their estate. This means that your client may have to pay inheritance tax on their death even if their estate is worth less than £325,000 before the value of any plan has been added.

Setting up a trust means that your client is making a gift of some, or all, of the plan. This means that your client is removing that part of the plan from their estate so no inheritance tax is normally payable on it, so long as they do not die within seven years of setting up the trust.

However, Mr Smart warns some inheritance tax may still be payable following a claim if the plan proceeds are kept within the trust after the next 10-year anniversary of its establishment following the death occurring.

He says it is important to remember that in most cases once a policy is written in trust the trust is generally irrevocable and in most cases it is not possible to simply cancel the trust.

“It is therefore important when setting up the policy to consider carefully whether the policy should be taken out by one person or jointly and also the level of flexibility of the trust to be used. The most flexible solution is always to have single-owner plans and to use the appropriate version of the discretionary trust.

“It is also important to choose your trustees wisely. These are the people who will administer the trust and will be able to make decisions about who will benefit and when. It is vital that you keep in touch with these people so they can be contacted when there is a claim or if their circumstances change so that this can be taken into account when deciding whether they should remain as a trustee.”