Writing insurance in trust may be one of the most valuable pieces of advice an IFA can give to a cli...
Writing insurance in trust may be one of the most valuable pieces of advice an IFA can give to a client. At what is usually an emotionally fraught period, the security that comes from having placed the policy in trust can help provide some protection from potential financial hardships.
A trust is an arrangement that allows people to choose who will receive the benefit of certain assets, known as the trust property, without giving them immediate control over them. The creator of the trust is the settlor. The people named in the trust who are to manage and deal with it are the trustees, and the beneficiaries are the people who will receive the benefit of the trust.
There are three main reasons policies should be written in trust. First, the settlor maintains an element of control because they can choose who is to benefit from the policy. This can be important if they have not made a will because their assets will become a part of their estate and intestacy rules will apply. This means the process of establishing the beneficiaries, known as probate, may not always cause assets to reach those for whom they were intended.
Speed of access to the assets is another important issue. If an asset is not subject to a trust and becomes part of the estate, it can take weeks or even months for the probate to be decided.
But, because trusts avoid probate and are not part of the legal estate, the beneficiaries can gain access faster.
Thirdly, trusts can have major tax benefits. If the assets form part of the estate and the estate is valued at more than £234,000, it is subject to inheritance tax, which means 40% of the estate will go to the taxman.
Most life assurance policies can be written in trust but there are a number of different types of trust and choosing which one will depend on the personal circumstances of the client. If the client wants to take out an insurance policy to provide for their family when they are gone, they will not want to lose a sizeable part of the payout through tax. Most people are concerned that the money quickly reaches the intended beneficiaries, so they are spared further worries at this time. A trust based around the settlor's family may be the best solution.
Mark Edwards, IFA personal market leader at Royal & Sun Alliance, believes this is a key factor in placing life insurance in trust, not from simply to avoiding inheritance tax.
He says: "Only around 2% of the country will have to pay inheritance tax, so it is not an issue unless you are wealthy. But if you are well-off and likely to pay the tax, you will want a policy to pay the tax bill so the beneficiaries do not have to pay a personal check."
Another area in which writing insurance in trust may prove invaluable is when it is used to protect a mortgage. Ian Smart, marketing technical support manager at Scottish Provident, says: "The family can repay the mortgage and so there are no worries about losing the main income provider and being repossessed. The tax aspects are not quite as strong but the control and access aspects are still there."
The relevance of protecting a mortgage through a trust depends on whether the life insurance is written under single or joint lives. Mike Turner, product manager, protection, at Friends Provident, says: "You do not necessarily need a trust for joint life plans because they pay out to the survivor and the money is then theirs to deal with. The large majority is written in joint lives but it is something that should be considered for single life policies. If you think that the average house is now around £100,000, you are already almost half way to the inheritance tax threshold."
Life policies are not the only insurance suitable to be written in trust. A split trust policy can include life and critical illness benefits, or indeed any other benefits. Under an accelerated policy, a split trust allows any critical illness benefits to be paid to the policyholder should they need to claim, and then death benefits will be paid to the family after death.
Alternatively, the money is paid out for a critical illness and the remainder is placed in trust for the beneficiaries after death. Smart says: "You can place critical illness policies in trust because when you are seriously ill, it can be sometime before you are well enough to deal with it and it makes sense to appoint trustees to help you deal with the arrangements."
In the business environment, writing insurance in trust may actually be just as important to clients because making sure the money goes to the intended beneficiaries can often be even more complicated.
With group life based around the partners in the firm, a trust can be established in which, after the loss of a partner, the benefits are paid to the trustees and then to the beneficiaries. This means the remaining partners can quickly get the money needed to purchase the deceased or retiring partner's share.
Edwards says: "The under trust route is pretty flexible and is suitable for all sizes of partnerships. All policies are on an own life basis, which represents their interest in the partnership. It is written in trust for the benefit of the others and it does not go through probate."
But, just as with personal insurance written in trust, there can be more complicated situations. Rod Macdonald, head of sales and marketing at Permanent, says: "If critical illness is involved as well, it can get more complex. If the sum assured is payable to the other shareholders and they use it to buy his shares, what if he is able to come back to work? It needs to be thought through carefully with the IFA."
Writing business protection policies in trust can be a very good opportunity for IFAs to add value to a sale because it can potentially save their clients a substantial amount of time and money when they are dealing with the loss of a partner. Macdonald says the new regulations coming in are an ideal opportunity for IFAs to sell a greater number of products and write them in trust if necessary.
He says: "Stakeholder is a good opportunity to sell everything else as well as pensions. Employers may also be able to get corporation tax relief which, depending on the premium, can potentially be netted down by more than 30%."
Until the last few years, very little insurance was actually written in trust. Smart says: "Only about 10% of our insurance applications are accompanied by a trust application. Although this has actually doubled in the last few years, it is an area that requires more attention."
Although trusts are legal documents and can be quite complex, many insurance providers now have their own trust forms that have been drafted by solicitors and designed around their policies.
It should not be forgotten that trusts are legal documents, however, and because each client will have their own specific needs, which may require the drafting of a complicated trust, IFAs should not be afraid to get help from a solicitor who can draw up a specific trust. Smart says: "It is good practice that the benefits of a trust are fully explained. Companies have been sued in the past for not advising clients to do it and it is important for IFAs to recognise this. They should advise clients to seek advice from a solicitor if they are not confident themselves."
Writing insurance in trust can have advantages for both the client and the IFA. Clients can ensure that a claim will quickly reach their intended beneficiaries and IFAs can add value to the sale and make valuable contacts. Paul Heaphy, protection marketing manager at ZIFA, says: "You could argue that all death cases should be written in trust. IFAs have to see the trustees when they are setting it up so they are seeing the next generation of clients. When the money is paid out, who is the first person they will call when they need advice?"
Ben Marquand is staff writer at Cover magazine
Alzheimer’s is the most common cause of dementia
Total of 72 accredited firms
23% fall since Q1
Achievements, charity work and other happy snippets
Including advice firm Chadkirk WM