What Is Placing My Policy In Trust?
When you take out a life insurance policy, you probably have a good idea of who you wish to benefit from a pay out in the event of your death. Maybe it’s simply your mortgage lender, so that you can clear your mortgage - or perhaps you want it to go to your husband, your wife or your children. If this is the case, then you will need to place your life insurance policy in trust.
If a life insurance policy isn’t placed in trust, and it does pay out - the monies automatically become part of your estate. Whilst this may sound sensible enough, it means that the life insurance money will then be included in your estate. This means that it will be divided up with the rest of your estate – instead of going to the beneficiary that you might have intended. It can also delay the release of the funds to your loved ones - as part of the estate the money cannot be distributed until probate has been granted - a process that at best may take months, and at worst could take years.
There’s also the matter of inheritance tax that needs to be taken into consideration. This tax doesn’t apply when the estate passes to your spouse, but it does apply when the estate passes to your children. At present, inheritance tax is charged at 40% on anything over the tax-free threshold of £242,000. If your life insurance pay out pushes the value of your estate over this level, your dependants can lose out significantly.
The answer is to place your life insurance policy in trust. This means that the money should go to a beneficiary of your choosing - and that the payment can be made as soon as possible. Most life insurers can help you to set your new life insurance policy up in trust when you take out the policy - but you can choose to place an existing policy in trust at a later date.
However, there are some points you should bear in mind. It is a good idea to be one of the trustees - so you can retain some control of the policy (but bear in mind if you are the only trustee, in the event of your death the monies will pass to the estate, as if the policy hadn’t been placed in trust at all). Your spouse is usually a good choice for a trustee, but be aware that they will retain this status in the event of a divorce or break up (!) and may choose to ignore your original wishes. Be aware of potential conflicts of interest too. For example, if you appoint your sister as a trustee, and she is also a potential beneficiary - she will legally be able to withdraw the proceeds of the fund for herself, instead of your wife or children.
Be aware that you can also appoint an accountant or solicitor as a trustee if you wish, but they are likely to charge you for this service. Ideally you should appoint 2 or 3 trustees who are trusted family members, or close family friends. Remember that running a trust is a big responsibility - especially if trustees are required to manage funds that are providing an income for dependants, or that won’t be released for a number of years (for example, if your children are still under 18).