Which policies should be placed in trust?

As an individual does not benefit from their own life insurance policy - you need to pop your clogs first - Kevin Carr, chief executive of Protection Review, points out most people do not mind changing the ownership.

Trusts are arrangements that allow the person making the gift, the settlor, to transfer ownership of their assets to another party, the trustees. The trustees hold the assets for either the sole benefit of a chosen person or group of people, the beneficiary, without giving them access to the assets for the time being.

Deciding how to set up a trust to best suit the customer can be quite complicated, according to Esther Dijkstra, head of intermediary protection propositions at Scottish Widows, and you must always stress that they may want to seek professional advice from a solicitor.

However, Ian Smart head of product development and technical support at Bright Grey and Scottish Provident argues almost all policies should be placed into trust. He says exceptions to this include plans that are being used for loan cover where it will be assigned to the lender.

“An income protection policy is unlikely to benefit from being put into a trust but almost all policies that include benefits payable on death, and even some critical illness policies, would more often than not benefit from being written in trust.”

Ms Dijkstra agrees that it is appropriate for life cover to be put in trust, adding that it is also relevant for death cover for family protection for inheritance tax purposes and business insurance death cover.

She continues: “There is also a requirement for relevant life cover to be put in trust to gain tax relief.”

She states, though, that she would not recommend placing either critical illness cover or income protection in trust.

Clients who already have an inheritance tax liability, or are looking at providing cover against an IHT liability, should always look to put their policy in trust.

Couples who are not married to each other or in a civil partnership who are taking out insurance should consider putting their policy in trust, according to Chris McNab, protection product manager of LV, as there is not a spouse’s exemption.

From an inheritance tax point of view, HM Revenue & Customs will therefore treat the half of the payment to the survivor of civil partnership or couple as being included in the deceased’s estate for IHT purposes.

Clients with young children looking to provide family protection should definitely consider placing a policy into a trust, Mr McNab points out, as a minor cannot inherit money. Using a trust with appointed trustees ensure that the proceeds from any claim are looked after for children’s eventual benefit when they reach adulthood.

Mr McNab says any client who has not made a will should be encouraged to do so and be advised to consider placing their policy in trust.

He says “Otherwise the proceeds will be divided according to the laws of intestacy and may not go to the people they had in mind.”