Trust Guide

This is intended for intermediary use only.

Trusts can be an important part of financial planning, particularly with life insurance. Below you will find a comprehensive guide to trusts which we hope is written in an easy to understand way.

Trusts do:

allow your family to benefit from your life insurance instead of the taxman
allow you to choose who you want to benefit
allow you to change in some circumstances who should benefit
and, give your family access to benefits without delay.

Trusts do not:

mean you give up control of your assets; and
have to be expensive or difficult to set up with our help.

There may be some benefit in you considering a trust if you,

have taken or are about to take out life insurance to protect your family against financial hardship if you die
have assets in excess of the Inheritance Tax Threshold
or, have made investments with the intention of passing some of these to other family members

This introduction will help you answer some of the common questions about trusts and help you decide what to do next.

Why a trust?

A trust is a means of specifying who will receive the benefit of certain assets without giving him or her full and immediate control over them. A trust is usually created by a document, the trust deed, which names the people involved and sets out the terms of the trust. A trust can also be created by your will. Trusts are recognised throughout the United Kingdom but rules can vary depending on whether you live in England, Wales or in Scotland.

Who becomes involved in setting up a trust?

You, as the person creating the trust are known as they settlor. You are providing the asset of the trust, which is then known as the trust property.

The people who manage the trust are known as the trustees. You decide who you want to be the trustees. With most trusts you are usually a trustee. So it is possible to retain control over the assets that you have placed under trust.

Can I benefit from the trust?

Some trusts do allow you to benefit but others will not. You may only benefit from the trust if it is specifically provided for within the trust. In some circumstances you may have to pay tax if you are a beneficiary.

Can I change my beneficiaries?

Many trusts, are flexible and give the trustees the ability to change beneficiaries. This can be a useful feature if your circumstances change or you change your mind over whom you want to benefit. If a trust includes this facility, the people who you may appoint will be set out in the trust deed. However, only those people who fall into one of the classes of discretionary beneficiary in the trust form can have benefits appointed to them. So you should think carefully about who you want to include as a discretionary beneficiary when you fill in the trust form, although you may also nominate new discretionary beneficiaries in writing to the trustees. If you change your beneficiary this could affect his or her liability to inheritance tax if he or she dies, so you should ask for advice before making any changes.

Who do I appoint as a trustee?

As the word suggests, a trustee should be someone you trust. For example, another family member, a close friend or your family solicitor could be appointed as trustee. Trustees must be over 18, mentally able and must not be bankrupt. Trustees must accept their appointment for it to be valid. In accepting their appointment, trustees must carry out certain obligations and duties, so the position should not be taken lightly.

Why should I put assets under trust?

Trusts are used for many different reasons and the advantages available depend very much on your own circumstances. The main advantages are as follows;

Get the money in the right hands

You choose who you want to benefit from the trust for example, your wife or husband or children. The trustees are under an obligation to look after the trust property for your chosen beneficiary. So, a trust makes sure that the benefit of that property will got to the right people.

Getting the money when it is needed most

If an asset is not under trust your personal representatives (the people you have asked to deal with your estate after you die) will need to get the appropriate ‘Grant of Representation’ before they can deal with that asset. This process is known as ‘probate’ in England and Wales, or ‘confirmation’ in Scotland.

Probate is the legal process of confirming who can deal with the estate of a person who has died before the assets of the estate can be distributed according to the terms of his or her will. If someone dies without leaving a will they are said to have died ‘intestate’. Their estate will be divided according to rules known as the ‘laws of intestacy’. This can be a lengthy process and can take several months. In the meantime, your family could be suffering financial hardship following your death.

By placing assets under trust, you can avoid the need for probate as long as there is at least one surviving trustee when you die. This is because the trustees are the legal owners of those assets. So they can deal with the trust property immediately making sure your chosen beneficiaries do not suffer financially after you die.

This can be particularly important if the trust property is a life insurance policy. One of the most common reasons for taking out life insurance is to provide for your family after you die. By writing the policy in trust you can make sure that the proceeds of the policy are paid to them without delay.

Tax Planning

Trusts can also be used for tax-planning reasons. Inheritance tax can apply even to the simplest life insurance policy. This can be avoided by using an appropriate trust. Currently, inheritance tax is payable at a rate of 40% on estates value over the Inheritance Tax threshold, although gifts to your husband and wife are not included. This means that you may have to pay inheritance tax on estates that are worth less than this once the value of any life insurance is added.

As well as avoiding inheritance tax being charged, you can use a trust and life insurance policy to make sure your family has funds available to pay any liability that cannot be avoided. This will stop them having to take an expensive loan or even sell the family home to pay any tax due after you die.

What sort of life insurance policies can be put under trust?

Generally, most policies can be put in trust although it may not be appropriate to put some policies in trust. Most term insurance or whole of life policies would probably benefit from being in trust for the reasons given earlier if they are intended to provide money for your family when you die. However, a policy intended to repay a mortgage would not be written in trust if it was assigned to the lender. The right trust to use will depend on the type of policy, why you are taking it out and who you want to benefit from it.

The Flexible Trust

This is the basic type of trust for family protection or inheritance tax planning. You, the policyholder, cannot be the beneficiary, but you can leave everything to your chosen beneficiaries. However, the trust has the flexibility to allow you to change your beneficiary if you change your mind or if your circumstances change. You can use this trust with protection policies if you want to provide for your family. You can also use the trust with a With-Profits Bond or Capital Investment Bond if you want to make a tax-efficient gift of a lump sum of money. You must still be alive 7 years after setting up the trust for inheritance tax to not apply to the original sum.

The Business Trust

The Business Trust is specifically designed for business protection policies (partnership and shareholder protection). The partner’s or shareholder’s policy can be written under trust, with the beneficiaries being other partners or shareholders in the business. This makes sure that surviving partners or shareholders have the funds to buy a deceased person’s wife or children.

The Split Trust

The Split Trust is for protection policies that include both death and critical illness benefits. The idea of the Split Trust is to allow the death benefit to be given to the beneficiaries while still allowing you to have the critical illness benefits paid to you if you suffer a critical illness.

The Family Trust

The Family Trust is for use with single premium Capital Investment or With-Profits Bonds. The Family Trust gives you a lifetime interest, which means that you have access to the policy while you are still alive but can avoid probate and leave it to named individuals when you die. Although initially there is no inheritance tax saving, three extra deeds are available which you can use to secure savings.

Legacy Loan Trust

The Legacy Loan Trust allows you to have access to your money because you only make a loan to the trustees. You can ask for the loan to be repaid at any time. The trustees use the loan to invest a in a With-Profits Bond or Capital Investment Bond. You will only pay inheritance tax on any of the loan that has not been repaid. You do not have to pay any inheritance tax on any profit the Bond makes.

We hope this helps to explain the important use of Trusts within financial planning. If you would like further help with your trust queries please call us on 01243 791199.