Writing protection policies in trust – is it time for change?

4 December 2020
When it comes to writing life policies in trust it sometimes feels we're hamstrung by convention and the legislation that convention forces us to follow.

There’s nothing quite like a crisis, such as a global pandemic, to make you sit back and wonder whether there’s a different way to do things. It’s true that there's been an acceleration of the use of technology in many parts of financial services.

Greater use of electronic signatures, video conferencing instead of face-to-face meetings, home working rather than being in an office... All examples where existing technology has been utilised to cope with the trying times we're in and are likely to continue long into the future.

We've seen some innovation with trusts in the last few years with signature free trusts and the use of electronic signatures, but they have their limits.

In order to have a valid trust you must have what are known as the three certainties. These are

  • the certainty of intention to create a trust,
  • the certainty of subject i.e. what property is subject to the trust, and
  • the certainty of object i.e. who is to benefit. 

As long as these are present, there is a valid trust created. The trust doesn’t even need to be in writing, though that can then make it difficult to prove it ever existed.

Signature free trusts

Signature free trusts rely on the first of those certainties to remove the need for a signature.  Simply declaring to your financial adviser your intention to create a trust, and for the policy to be issued subject to the terms of that trust, ensure the certainty of intention is met.  The wording used confirms the other two certainties of the trust property and the beneficiary and so you have a valid trust and nothing needs to be signed.  But this only works for new policies and only if completed before the policy starts so must be completed during the application process.

The conventional way to create a trust is by the completion of a deed.  This can be used either for a new or existing policy.  But under the current legislation there are formalities that must be complied with for the deed to be properly executed. 

Some difficulties can still be encountered while there are restrictions on being able to meet people from outside of your own home.

The deed must be signed by the person creating the trust in the presence of a witness who also signs.  This can be done either in wet ink or using an electronic signature.  The potential issue, currently, is that the witness must be physically present when the settlor signs. This means that the witness cannot watch the signing remotely by video. Whilst the law around witnessing wills has been changed to allow video witnessing, it has not yet been changed for deeds.  So, again, some difficulties can still be encountered while there are restrictions on being able to meet people from outside of your own home.

The policyholder signs

However, just because this is the convention, it doesn’t mean it is the only way a policy can be assigned. Section 136 of The Law of Property Act 1925 governs the legal assignment of things in action. This section allows for a debt or other legal thing in action to be assigned ‘by writing under the hand of the assignor’. 

A life policy is technically a ‘chose in action’ and therefore falls within the definition of a legal thing in action.  It is therefore possible for a life policy to be assigned without the assignment being by deed and the formalities of witnessing can therefore be dispensed with.  The assignment only needs to be signed by the assignor, in this case the policyholder, in favour of the trustees for them to hold the policy subject to the terms of the trust declared in the same document.

This isn’t new legislation, it dates back to 1925. And whilst it only applies in England and Wales, there’s nothing to stop someone in other parts of the UK creating a trust that is subject to the Law of England and Wales in this way.  

By blindly following convention, we as an industry have potentially been making the whole process of writing a policy in trust more difficult than it needs to be. This has no doubt added to the reasons so few policies that should be are written in trust.

By blindly following convention, we as an industry have potentially been making the whole process of writing a policy in trust more difficult than it needs to be. This has no doubt added to the reasons so few policies that should be are written in trust.

The Swiss Re and Insuring Change report Trust Registration and Unintended Consequences from November 2019 revealed that across the industry only 5-10% of new term plans are currently written in trust each year.  The addition of even modest sums assured to someone’s taxable estate can easily push them into an Inheritance Tax charge of 40% if the policy is not on trust. That could mean a bill of up to £80,000 on a £200,000 policy. But equally importantly it could mean the money ends up in the wrong hands even if there is no tax to pay.

Another solution

But are trusts the only way that you can make sure the benefits end up in the right hands? The answer is no, there’s an even simpler solution which will suit many customers.

Some providers, Royal London included, allow clients to nominate a beneficiary as part of their application for cover.  It works by including in the contract the ability for the customer to specify who they want to receive any benefit paid after they die. As it’s part of the contract the nominated beneficiary can claim under the policy in their own right with no need to wait for probate to be granted.

As it’s part of the contract, the nominated beneficiary can claim under the policy in their own right with no need to wait for probate to be granted.

It’s not currently widely available as this is only available from two providers.  But it's something that should be considered for clients with straight forward needs and there are no complicated forms to fill in.

Some companies have already made changes to some of their trust forms as a result of being forced to think whether there is another way.  I have no doubt others will follow in both changing their forms and adding the ability to nominate a beneficiary.

Trusts also still have their place and we should continue lobbying for a change of legislation to remove the need for the physical presence of a witness where a conventional deed is used as not all assignments can be completed in this way. But there can be no better time to adopt a simpler process so that more people can more easily make sure that their benefit is paid to the person they intended to receive it.

If you’d like to learn more about either writing protection policies in trust or the concept of nominating beneficiaries at the application stage, you can watch our webinar – ‘Better Protection Outcomes – Right Money, Right Hands, Right Time’.  Plus you’ll earn valuable CPD time!

Share

Share

About the author

Ian Smart

Product Architect

Ian has worked in financial services since 1984 and has provided technical support and been involved in product development since 1992. He joined Royal London in 2001, initially as technical product manager for Bright Grey, before becoming head of product development & technical support for both Bright Grey and Scottish Provident and latterly product architect for Royal London.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.