The Power of a Trust: Why It’s important to Write Your Life Insurance Policy in to trust (and What Happens If You Don’t)

Taking out a life insurance policy is a responsible step towards protecting your loved ones’ financial future. However, simply having a policy in place isn’t always enough to ensure it works as effectively as possible. In the UK, writing your life insurance policy “in trust” is often the most advantageous way to structure it, offering significant benefits that can be lost if this crucial step is overlooked. Let’s delve into why trusts are so important and the potential dangers of not using one.

What Does “Writing in Trust” Mean?

When you write a life insurance policy in trust, you essentially appoint trustees who will legally own and manage the policy on behalf of your chosen beneficiaries. This means the proceeds of the policy, upon your death, are paid directly to the trustees, who then distribute the funds to your beneficiaries according to the terms of the trust deed you’ve set up.

The Powerful Benefits of Writing Your Life Insurance in Trust:

1. Avoiding Inheritance Tax (IHT): This is often the most significant advantage. If your life insurance policy is not written in trust, the payout will usually be considered part of your estate for Inheritance Tax purposes. With the current IHT threshold and rate in the UK, a substantial portion of the payout could be lost to tax, reducing the amount your loved ones ultimately receive. When a policy is correctly written in trust, the proceeds generally fall outside of your taxable estate, meaning more of the money goes directly to your beneficiaries, as you intended.
2. Speeding Up the Payout Process: When a policy isn’t in trust, the payout typically has to go through probate. Probate is the legal process of administering your estate, which can be lengthy and complex, often taking many months or even years to complete. This delay can leave your beneficiaries waiting for crucial funds at a time when they may need them most, such as to cover immediate living expenses or funeral costs. A policy written in trust bypasses probate, allowing the trustees to distribute the funds much more quickly to your beneficiaries.
3. Greater Control Over Who Receives the Money and When: A trust allows you to specify exactly who your beneficiaries are and, importantly, under what circumstances they should receive the funds. This can be particularly useful in situations such as:
   • Providing for minor children: You can appoint trustees to manage the funds until your children reach a certain age.
   • Protecting vulnerable beneficiaries: You can ensure the funds are managed responsibly for individuals who may not be able to handle large sums of money themselves.
   • Phased payments: You can instruct the trustees to distribute the funds in stages rather than as a single lump sum.
   • You can specify excluded beneficiaries, meaning if you are worried someone may try and claim a proportion of your life insurance proceeds after you pass, they can be specifically named as not eligible to receive any funds. This may be important for individuals who are, for example, separated and want to ensure all funds are left to the children rather than an ex-partner or spouse.
4. Increased Privacy: Unlike assets that pass through probate, which become a matter of public record, the details of a trust and its beneficiaries remain private.

The Dangers of NOT Writing Your Life Insurance in Trust:

1. Significant Inheritance Tax Liability: As mentioned earlier, the most significant danger is that a large portion of your life insurance payout could be swallowed by Inheritance Tax, substantially reducing the financial support available to your family.
2. Lengthy Delays in Receiving Funds: The probate process can be protracted, leaving your beneficiaries facing financial uncertainty for an extended period. This delay can be particularly stressful when they need the money urgently.
3. Loss of Control Over Who Receives the Money and When: Without a trust, the payout will simply go to your legal beneficiaries as defined in your will (or under intestacy rules if you don’t have a will). This lacks the flexibility to tailor how and when the funds are distributed, potentially not aligning with your specific wishes or the individual needs of your loved ones.
4. Increased Complexity and Potential Costs: Dealing with probate can be complex and may involve additional legal and administrative costs for your estate.

Who Should Consider Writing Their Life Insurance in Trust?

In most cases, writing your life insurance policy in trust is highly recommended, especially if:

• Your estate (including the potential life insurance payout) is likely to exceed the current Inheritance Tax threshold.
• You want your beneficiaries to receive the money quickly without the delays of probate.
• You have specific wishes regarding how and when the money should be distributed to your beneficiaries, particularly if you have minor children or vulnerable individuals to provide for.

Getting It Right

Setting up a trust doesn’t have to be complicated, but it’s crucial to get it right. It’s highly recommended to seek expert help. They can help you understand the implications for your specific circumstances and ensure the trust is set up correctly to achieve your desired outcomes.

Don’t Let Your Good Intentions Be Undermined

You’ve taken the responsible step of securing life insurance to protect your family. By taking the extra step of writing your policy in trust, you can ensure that more of that protection reaches your loved ones quickly, efficiently, and without the burden of unnecessary taxes or delays. Don’t let the potential pitfalls of not using a trust undermine your thoughtful planning. Speak to a professional today to explore how a trust can maximise the benefits of your life insurance policy.

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