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Using trusts

Protection focuses on getting money to your client’s loved ones, when it’s needed most. By using trusts, they can be sure the money paid from their plan is handled in line with their wishes – avoiding probate.

Trusts ensure the money from a protection policy is given:

  • To the right people.
  • At the right time.
  • Usually without any inheritance tax liability.

There are different types of trusts available – once a policy is placed in trust, it usually can’t be changed. It’s important to know if our trust deeds are suitable to your client’s circumstances before you decide to use them. If in doubt, please speak to a legal specialist.

Who is needed to set up a trust?

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Settlor

A settlor is the person or people who set up the trust and put their life policy into it. They would be the current owners of the life insurance policy. The settlor chooses the trustees and decides who they want the beneficiaries to be.

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Trustees

These are the people responsible for looking after the policy put into trust for the beneficiaries.

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Beneficiaries

These are the people who get the money from the trust.
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Settlor

A settlor is the person or people who set up the trust and put their life policy into it. They would be the current owners of the life insurance policy. The settlor chooses the trustees and decides who they want the beneficiaries to be.

Putting a policy in trust

Advantages

  • Proceeds are paid to the right person or people.
  • Proceeds are paid out quickly; there's no need to wait for probate (which can take some time).
  • Helps to avoid inheritance tax - the proceeds won't normally be included in the deceased's estate and can usually pass tax-free to whoever is chosen as beneficiaries.

Disadvantages

  • The policy can't be taken out of trust later on.
  • Control over the policy is given to the trustees, so your client can't make changes to it.
  • Your client can't benefit from the policy (which can be complicated for joint life policies).

Survivorship clause

A survivorship clause allows a surviving settlor to get the proceeds of a trust if they survive 30 days from the death of the first settlor’s death. If both settlors die within 30 days of one another, then the trust property reverts to the beneficiaries.

For example, if your client is married with children, and took out a jointly owned policy they could ensure the proceeds of their protection policy would go to:

  • The children if both your client and their spouse die within 30 days of one another.
  • The surviving spouse if one of them survives the other by 30 days.

This means the trust can be flexible enough to provide the money where it’s needed – supporting the family at a difficult time, or providing for children without being part of their estate for inheritance tax purposes.

To include the survivorship clause, your client will need to opt in when filling in the trust deed. This is explained in the guidance notes for the trust deed.

It's important to understand that the survivorship clause can only be included when your client first places their policy in trust. It cannot be added or removed at a later date.

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