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Regulatory requirements for policies in trusts

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

There are no regulatory requirements to put policies in trust but there are potential risks for advisers who fail to mention and explore this option with their clients.

Kevin Carr, chief executive of Protection Review, says while there are no official regulatory requirements for putting an insurance policy into a trust, most policies should be in trust from the outset.

Ian Smart, head of product development and technical support at Bright Grey and Scottish Provident, says it is arguable that trusts should be discussed with clients under the Treating Customers Fairly principles.

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By not discussing this with clients, Mr Smart warns an adviser would be leaving their client or their family with the potential for avoidable delays at the time of a claim and potential tax liabilities.

He says there is also case law that suggests that if an adviser chooses not to tell their client about the consequences of not writing their policy in trust, unless they have clearly explained that they will not be providing advice in relation to the trust they could still be held liable for any loss the client may incur because of the lack of a trust.

“Advisers would therefore be well advised to make sure they set out clearly the extent of the advice they will give.”

Esther Dijkstra, head of intermediary protection propositions at Scottish Widows, agreed it is good practise to always consider putting a policy in trust at the outset.

She warns advisers that life offices have faced legal challenges where a policy has not been put in trust and there have been inheritance tax implications for the customer.

Chris McNab, protection product manager of LV, says advisers should always remember a trust is a legal instrument and for a trust to be considered valid there are three legal certainties that need to be established, in particular:

1) Words: there needs to be a clear intention to create a trust, in most cases this will be met by the client completing a trust deed.

2) The subject matter: the property of the trust (for example a life insurance policy) must be clearly stated on the trust deed (usually the client’s policy number). A trust cannot exist without any trust property.

3) Objects: a trust must have beneficiaries. These are either specifically named by the client in their trust deed, a pre-populated list of potential beneficiaries usually listed in the trust provisions, or both.

In order for a client to put their insurance policy into trust, Mr McNab points out they must be the policy owner at the time.

Therefore clients who have assigned their policy to a bank or building society for security against a loan, or have a legal charge over their policy, cannot put it into trust.