It’s all about trusts

18 March 2020
Not all advisers consider adding a trust to their service during the protection sale. It’s true that some trusts can be complex and time-consuming documents that some would rather leave to a solicitor.

Man with bike helmetNonetheless, they can present considerable advantages to your clients and can be counted as another string to your bow when it comes to the value of seeking professional advice.

What is a trust?

Trusts – the word conjures up thoughts of hefty documents thick with legalese. But they don’t have to be like that. Simply put, a trust is a legal form which holds money or other assets for someone else. Often, they’re an inexpensive, simple and efficient means of making protection better value for your clients.

There are three good reasons to put a protection plan in trust:

To get the full sum assured to the beneficiaries without paying more tax on the estate.

If a claim for £100,000 of life cover is made, and the plan is not in trust, the sum assured will pass into the client’s estate. If the value of their estate, including the £100,000 payout, is sufficiently large, they’ll pay Inheritance Tax (IHT) at 40% on every £1 above the current IHT threshold – which is £325,000.

For example, in an estate valued at £500,000, the £100,000 payout would attract £40,000 of IHT – leaving only £60,000 available to your client’s family.

If their plan is put in trust, a payout of £100,000 would be held separately outwith the client’s estate after their death and therefore wouldn’t be subject to IHT. The full sum assured could then be passed to the beneficiaries.

To get the sum assured to the right people

A trust document, also known as a trust deed, will clearly show who should benefit from a life cover payout. Without a trust, the payout will go to either the beneficiaries named in a will, or if there’s no will, the State will decide who should get the money, based on the laws of intestacy. 

Some types of trust can leave the decision of who should benefit until later. The advantage of having this flexibility would be if a client knew their circumstances were going change in the future - for example, if more children were likely to be born. With this type of trust, the trustees can change beneficiaries accordingly, even after a client’s death.

To pay out the sum assured as quickly as possible

Even if a client has left a valid will, it can take weeks or months to legally prove the will.  Until then an insurance company can’t pay out the sum assured to anyone.  And if the will is disputed for any reason, it can take years for the Courts to settle it.

So, in short, a trust gets the right money to the right people at the right time. They can make life easier for a client’s family and beneficiaries after their death. However, in order to be attractive to your clients during the protection sale, a trust needs to be quick and easy to set up, inexpensive and understandable for all those involved in it.

Setting up a trust

A range of standard trust forms are often provided for free by insurance companies, and many, like Royal London, also offer technical help too. Standard trust forms are simple to complete (often running to just a few pages), easy to understand and will meet the needs of most clients.

It’s best to set up a trust at the same time as completing the application for life cover.

You’ll find that most plans are written under a discretionary trust. These offer the greatest flexibility – your client can leave instructions setting out what they’d like the trustees to do with a payout under certain circumstances, but any action taken is at the trustees’ discretion so they can act in the best interests of the beneficiaries at the time.

You may also come across the following types of trusts:

Absolute or bare trusts – Trustees hold any payout for the beneficiary until they can claim it, for example, trustees can hold funds for children until they turn 18. These trusts are very simple, but inflexible in terms of the choices the trustees can make in best interests of the beneficiaries.

Life interest trusts – A beneficiary has an interest in possession, so the funds in the trust are effectively held for them during their lifetime, after which another beneficiary is appointed.

Statutory trusts – In England, these are trusts under the Married Woman’s Property Act, 1882. These are simple trusts which can be used to gift the payout of life cover to a spouse and children. They’re designed to protect families against the threat of bankruptcy - due to this they’re inflexible and can only be used for single life cover policies. 

Within the trust, your client is known as the Settlor and they must sign the trust form (for jointly owned covers, both clients must sign), the appointed trustees will need to sign the form too. If a trustee dies, or wishes to stand down, most insurers have a Deed of Appointment form, that can be completed in order to change the trustees within a trust.

Beneficiaries of the trust don’t need to sign the trust form - they don’t even need to be told they’re a beneficiary of the trust until after your client’s death. This can be a helpful point if the beneficiaries are children.

After a successful claim is made, the trustees are required to distribute the payout according to the trust form wording.

The trustees your client appoints aren’t paid for managing the trust, but they can recoup any necessary expenses they incur. The trust deed gives trustees the powers to invest or borrow money – however, trustees must always act legally and in the best interests of the beneficiaries of the trust.

Benefits for you and your clients

Discussing the benefits of trusts with your clients during the protection sale can help show a client the depth of your expertise as well as provide peace of mind that they’re fully prepared in case the worst should happen.

To find out more about the business opportunities of making trusts a part of your protection conversation, and earn some CPD at the same time, why not sign up to our next protection webinar on 7 April at 10:30. 



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.

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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.