Trusts - frequently asked questions

Your questions answered

The Royal London trusts are flexible enough to allow existing trustees to be removed or new trustees to be appointed. The settlor has the power to remove a trustee by giving them at least 30 days' written notice. They can do this as long as at least 2 trustees remain, one of which is not the settlor.

Royal London can supply the following forms to help administer existing trusts:

Deed of Appointment of New Trustee / Removal or Resignation of Trustee

This deed can be used:

  • to appoint a new trustee to act with the current trustees.
  • when the settlor has requested the retirement of one or more of the trustees and wants to appoint other trustees at the same time, or no other trustees are being appointed. To request the retirement of trustees, the settlor must serve a Notice of Removal.
  • when one or more of the trustees are retiring voluntarily and the settlor is appointing other trustees at the same time, or no other trustees are being appointed.

The trustees' main duties are as follows.

  • To invest the trust fund.
  • To act impartially, if providing different benefits to each beneficiary.
  • Trustees may delegate their powers of investment and management to someone else.
  • To obtain and consider proper advice before exercising powers of investment.
  • To secure the trust property.
  • To keep records of any decisions and actions, as they may need to prove they are managing the trust fund properly.
  • To not use the trust to benefit themselves. If the trustee is also a beneficiary, then they must not use their powers as a trustee to gain any benefits over the other beneficiaries.

You can find more information about the role of trustee in our guide to being a trustee.

Business trust

Your client's spouse should not be included as a beneficiary under the business trust unless they are also a partner or shareholder. It is essential that any business protection arrangement be entered into on a totally commercial basis. The inclusion of people who are not also owners of the business would mean that this is not the case. This can lead to adverse tax consequences.

Covers are usually added by creating a new plan, which would either need to be assigned into the trust or a new trust created.

No. If your client was able to do this, the trust would have no effect for inheritance tax purposes.

No. The trust form sets out which of the covers are gifted and which are retained and this cannot be changed once the trust is completed.

Any monies from the protection plan will always be paid to the trustees. The trustees are then responsible for paying the money to the beneficiaries but must complete the Royal London 'Deed of appointment to benefit (absolute)' form before distributing any benefits.

We don't recommend using the Royal London trust with another company's plan. The Royal London trust forms have been designed with the terms and conditions of a Royal London plan in mind and the words we use within the trust fit with our plan terminology. To use it with another plan would be dangerous as the words we use in the trust are unlikely to be exactly the same as those used by another company. This could mean the trust is invalid or could have adverse tax consequences. If your client wants to put another company's plan in trust, we recommend that they ask the other company or their solicitor to supply the appropriate form.

For the same reasons, we also don't recommend that you use other companies' trust forms with a Royal London plan.

Although the plan is in trust, inheritance tax could still be payable in some circumstances.

If the claim is for Income Protection no inheritance tax is payable as this has no value in your client’s estate when they die.

If the claim is on death or diagnosis of terminal illness, a critical illness or Total Permanent Disability, there will be no immediate liability to inheritance tax as this will not be part of your client’s estate. However if the proceeds of the plan remain in trust past the next 10-year anniversary of the date the trust was created, a liability can arise.

The liability is calculated by looking at the value of the trust fund on the 10-year anniversary, any chargeable lifetime transfers your client made in the 7 years before the trust was created, and any amounts that have been taken out of the trust before the 10-year anniversary. If the total of these amounts is more than the nil rate band for inheritance tax at the 10-year anniversary, tax is payable on the excess. Tax may also be payable if money is given to a beneficiary after a 10-yearly charge has arisen.

An example

John took out a Royal London Business Menu Plan, which provided £300,000 of Life or Critical Illness Cover. He wrote this in trust on 4 Feb 2016. In 2014 he made a gift to a discretionary trust of £50,000. This created a chargeable lifetime transfer of £44,000 as he had made no other gifts and was therefore able to deduct 2 years annual exemption of £3,000.

On 1 June 2018 John suffers a critical illness and the plan pays out. No immediate tax is payable. John recovers and decides not to exercise his option to sell his shares in the business. The trustees decide to leave the money in trust as the beneficiaries are intended to be John’s co-shareholders and because of his illness John cannot get any replacement cover. On 4 Feb 2026 the trust fund has grown to £370,000 and the nil rate band is £325,000. No money has been taken out of the trust. Inheritance tax is now payable out of the trust fund and is calculated as:

chargeable lifetime transfers in 7 years before trust was created

A

£44,000

+ current value of trust fund

B

£370,000

 

C

£414,000

 

 

 

- nil rate band at 10-year anniversary

D

£325,000

 

E

£89,000

Tax at lifetime rates on E

 

£35,600

Tax at lifetime rates on A - D

 

NIL

 

F

£35,600

 

 

 

Periodic charge = F x 30%

 

£10,680

On 1 August 2027 John decides to retire and agrees with his co-shareholders that they will purchase his shares using the money held in trust. The trustees decide to give John’s co-shareholders £350,000 to purchase his shares. The nil rate band for inheritance tax is still £325,000. There would now be an exit charge calculated as:

Trust value at previous 10-year charge

A

£370,000

Periodic charge

B

£10,680

Effective rate of tax (B/A) x 100

C

2.89%

 

 

 

Number of whole quarters since last 10-year charge

D

5

Amount appointed

E

£350,000

 

 

 

Exit charge = E x C x D/40

 

£1,262.84

Last updated: 07 Mar 2017

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.