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Trusts
A trust is a way of transferring ownership of your assets. If you have assets over, or close to, the inheritance tax (IHT) threshold and you don’t want to simply gift everything away, one of the best ways to potentially reduce IHT liability is to put these assets in trust. However, trusts are usually set up on an irrevocable basis, which means they cannot be torn up and rewritten like a will.
There are three sets of people involved in a trust:
- The settlor – that’s you: the person who sets up the trust.
- The trustees – these are the people you entrust to administer the trust and look after the interests of the beneficiaries. It requires a degree of responsibility and the settlor would usually be one of the trustees.
- The beneficiaries – these are the people who will benefit from the trust.
When setting up a trust you need to choose these people carefully.
What is the benefit of writing Protection for Life in trust?
The advantages of putting some or all of your Protection for Life policies into trust are:
- You could drastically reduce potential IHT, yet still keep some control. This is because the proceeds of your policy in trust will not normally form part of your estate.
- In the event of your death, your life cover can be distributed more quickly to your beneficiaries, rather than going into your estate, where it could not be distributed until probate (or confirmation in Scotland) had been granted. This is as long as you appoint at least one additional trustee, who survives you and so can administer the trust after your death.
- If the intended beneficiary is a minor or someone unable to look after his or her own finances, a trust will help ensure that he or she will receive control of the funds only when the time is right.
- With our Flexible Power of Appointment Trust, the trustees have some flexibility to change the beneficiaries if circumstances change in the future.
Are there any disadvantages to putting the policy in trust?
- You must have the correct type of trust to make sure that it will do what you want it to do.
- You must make sure that the trust is written correctly – other benefits such as critical illness or terminal illness could go to the beneficiaries instead of you.
- Once a trust has been set up, it can be difficult to change, especially if you’re no longer in contact with one or more of the trustees.
- In certain unusual circumstances, the trust could become subject to IHT at up to 6%. For further information on this issue, please seek specialist advice from a financial adviser or solicitor
- If you have Critical Illness with Life Cover and are diagnosed with one of the specified critical illnesses but decide not to claim, an amount equal to the policy proceeds could become subject to IHT at up to 40% if you subsequently die.
- You should take advice from someone who is an expert in setting up a trust. A solicitor will be able to advise you fully.
The value of any tax advantages will depend on your personal circumstances which may be subject to change in the future. Remember tax rules can also change.
