Why should you be fussed about trusts?

[00:00-39:43] Gregor Sked

Welcome everyone to the latest Royal London webinar from the Protection and Pensions technical team. I'm Gregor Sked, Senior Protection Technical Manager, and I am delighted to be joined today by my colleague, Fiona Hanrahan, Senior Pensions Technical Manager. Now, I'm really excited for today's session because it's a topic we know that you're asking to hear more about, and it was the most popular webinar that we ran within our program 2025.

So, we've brought it back. A bit more of an updated version of it, but we have brought it back, and today it is all about why you should be fussed about trusts and more importantly, how you can and hopefully help you to have more thorough conversations around trusts and actually have them within the advice that you're providing clients with at the moment.

Now today, as always, it's going to be a session of two halves. I'll be taking us through the first half. We're going to be looking at the role of trust within protection advice, and then Fiona's going to be looking at the role that trusts play in how pension death benefits are passed on.

Now, as always, do get involved. Send us your questions, your thoughts, and any comments using the chat box. And then following today, you will receive a thank you email usually within the next 24 hours once our webinar has finished, and that will have a link to the webpage where you can rewatch the session today and also access your CPD certificate. Now, to receive that certificate, you will need to answer a few questions about the webinar today. Once they've answered once you've answered them correctly, then your certificate will be automatically generated for you to save for your records.

Now, as always, we also have some learning objectives to keep us on the straight and narrow, and they are for today's session to understand why getting trusts wrong can undermine protection outcomes, and how to correctly structure them so that we can make sure that we're achieving good client outcomes. We'll also look at confidently helping you to apply trust solutions in protection planning to align plan ownership, control and benefits with clients' needs. And lastly, understand when setting up a trust to receive pension death benefits might be appropriate and what rates of tax would apply.

Okay, so let's take a look at this trust gap. Now, back in, I think it was 2023, we carried out some research to try and understand the role that trusts are playing in modern protection advice. So, what we found was around about eight in ten advisers said that they sometimes or always discuss trusts when recommending life insurance. I would say that's positive to hear. But as an industry, you could say the conundrum is that we're not actually seeing a correspondingly high rate of life policies actually written into trust. It's in the low 20% just in terms of best estimations that we can see.

Now, if we think for a moment, why do people take out life insurance? So, if we park trusts aside for one moment, why do people buy life insurance? They're not ticking a box, hopefully. They're generally doing it with somebody in mind, be that a spouse, a civil partner, a child, or business partner, and their motivation is usually the same. Or at least driven by a similar want and desire, which is to make sure that if the worst were to happen, the people that they care about are financially looked after. Now, I would say those are good intentions, but intention alone isn't always enough to guarantee that the outcome that they expect from that life policy is achieved.

Now, I want you to imagine that you're sat across from a client. Maybe it's a first-time buyer or business owner, and they're taking out some life cover. Now you ask them these three questions. So firstly, is it important to you that the right people receive the money from your life insurance? It sounds obvious, doesn't it? But without a trust, and in the absence of a will, there's actually no guarantee that that's going to happen. It could go to a complicated estate. It could go to an estranged spouse.

Secondly, is it important to you that they get it quickly when it's needed most? Again, probably sounds like common sense, but if we're talking about a single life policy that's not in trust, most life insurance offices will want to see a grant of probate or certificate of confirmation before the funds from that policy will be released.

Lastly, is it important to you that the plan doesn't add to or create an inheritance tax liability of up to forty percent on your estate? Because where that policy isn't in trust, it could be included in the value of the estate for IHT purposes, and as we're all very well aware, that IHT net is widening for many people. And actually, that life policy that's not in trust could mean more people are finding themselves in the position where that life policy is pushing them into that IHT net. To put it another way, what we're putting life policies into trust for is to make sure that the right hands at the right time get the right money. Simple as that. And that is really the crux of why we're wanting to make sure we're including trusts in the protection advice that you're providing clients.

So how do we achieve those good outcomes? Well, let's consider a very important question. When a claim happens on a life policy, where does the money go? There are typically two or three routes that you'll be very familiar with, perhaps a fourth that you might not be as familiar with. So firstly, where does the money go from a life policy? Well, at claim it could go into the estate if we haven't set up any other direction, it could go into the estate of the deceased life assured. Potentially going to people that the life assured didn't intend for it to go to, potentially being held up because of probate, confirmation, potentially pushing that estate into the IHT net or exacerbating that existing IHT net problem.

Of course, the money could go into a trust, and we'll talk a little bit about that as we go through the session today as that’s the crux of what the session is aimed at. Life of another. So, I am actually often asked, is life of another a good alternative to a trust? And it can be in some instances. Let's say a husband takes out a policy on himself, his wife owns it, she has insurable interest. Like a trust, it keeps the proceeds out of the deceased estate. It can avoid probate, but the significant downside is that the third party owns that policy. And if that relationship were to sour, then the ownership and the payer are actually in the hands of that other individual, that third party. Reassigning the policy, cancelling it could require their agreement, a new policy, and that adds extra complications. Another issue is that the survivor simply gets the cash payout into their estate, whereas that trust could ring-fence the funds for children and others. In short, life of another is simpler on paper. We're not dealing with a trustee and some of the complexities of that. But trusts offer far greater flexibility and protection.

Now, the fourth route is one that you might have come across before. It might be new to you, and it's called beneficiary nomination. It's fairly new within the industry compared to the likes of a trust. And again, we're going to go into this in a bit more detail later on, but beneficiary nomination can be a really good option for more of your simpler, maybe more straightforward cases.

Okay now, I realise we've got a wide range of expertise on the call today, which is great, and we'll hopefully have something for everybody today. But I want to start off with looking at a few of the basics when it comes to trusts in protection advice. Now, of course, when we're setting up a trust, generally, we need to make sure that there are three things in place.

We need certainty of the intention, so there has to be clear intention that the person that is setting up the trust, the proposer, is intending to create a trust. We need certainty of subject matter, so it needs to be certain what property is being put into trust. And for my session today, we're going to be assuming that is a life policy.

We need certainty of object as well. So, the trust needs to be clear who the beneficiaries are. So, we need these three certainties to exist before we can create that trust. But when we've done that, once we've got the trust in motion, what exactly are we then doing? Or I suppose we probably better start with what exactly is a trust and why do we use it for life insurance. Why are we focusing on it today?

Well, a trust is essentially a legal arrangement that's letting somebody, we're going to assume in this instance again, the person that's taking a life policy, pass the ownership of that policy to others to look after for the benefit of somebody else. We're separating legal ownership from the beneficial ownership.

The four purple boxes on screen tend to be the high-level routes that you would use a trust for in protection advice, making sure that the plan proceeds go to the right people, taking the policy out of the estate meaning making sure we don't have- the trustees aren't waiting for probate or confirmation. And actually, it can also be a fantastic tool to pass wealth on to next generations.

But in terms of some of the practical applications here I've got six what I would say are real-world applications of trusts, instances where I've certainly seen and often helped advisers when we're looking at the role of trusts within protection advice.

So, they are firstly providing for a family. Now, that tends to be, I would say, the bread-and-butter use case for a trust in protection advice, making sure that the spouse or civil partner has financial support. But also, they've got control on how that is accessed. That can be quite good where maybe clients want that structure, that there isn't going to be you know, an outright windfall. There’s more thought and structure and control behind how those payments from that policy are actually paid out. And it can be a really good way for providing for future grandchildren or children who might not even be born yet.

Educational purposes. So here, I think the benefit that the trust plays is more around timing and governance. For example, a trustee could allocate the funds from that trust for particular reasons, like paying for education. And again, rather than having that large sum of money paid directly to a young person, it gives them a little more of a manageable way of receiving those funds via the trustee.

Vulnerable beneficiaries. So here trusts can be useful for when it comes to safeguarding assets. We're going to be considering instances where there might be vulnerable beneficiaries that could be at risk of exploitation, could be at risk of poor decision-making, and actually that risk of all that money being paid out in one go could be more of a negative than a positive. And again, that's about giving that more of a control around the flow of money via the trustees.

IHT planning. So again, about protecting the donees that have received maybe lifetime gifts to help them provide funds to pay that IHT bill to keep the, any potential tax liabilities under control.

And, business protection. You know, a really key area within the protection advice space, and trusts play a very, very important role here. Often that trust role is more about the functionality of the business plan because on death, the funds are going to be needed to buy, for example, if it's partnership protection the share back from the estate. So that trust structure is there to help ensure the proceeds are paid to the right party to help facilitate that outcome. And again, same logic with shareholder protection, that life insurance is there to help provide the funds so that on death, the remaining shareholders can buy the shares back from the deceased’s estate. Again, that trust ensures the money lands where it's needed to at the time that it's needed to as well.

One of the areas where I see a lot of confusion around trusts particularly when we're talking around the role of protection advice and trusts, is the fact that there are a lot of different types of trusts out there. There are many types of trusts. They've all got different reasons for being put in place. Often, they will state that in the name what the intentions of the trust are for. Others aren't as clear. In protection advice, you are most commonly going to be dealing with one or two types of trusts, bare trusts or discretionary trusts.

Now, I would say it's good to have a basic distinction of both. I'm not going to go too much into the technical nuances between both of them today. The reality is, in protection advice, we tend to see discretionary trusts used almost universally. And we'll try to show why that's the case over the next few slides.

But if we look at bare trusts firstly, so they are generally quite simple. It's quite transparent in that the named beneficiary is clearly laid out when the trust is set up. And once that individual's been named, that beneficiary or beneficiaries have been named, they can't not be. They can't be changed later. That's not something that is that can be changed at a later point in time. Really, the trustees are just looking after that trust property until it's passed to those individuals that have been named.

On the other hand, discretionary trusts, they give trustees a lot more, as the title suggests, discretion, a lot more control, a lot more flexibility. And within here, the trustees do have a lot more power and control. There is often within here a list of potential people that get access or be entitled to the property of the trust, but it is entirely up to the trustees to appoint that trust property to those potential individuals. One of the benefits with a discretionary trust, and actually why they're very good in the protection’s world, is that they can adapt to real-life changes. Maybe a new grandchild, a divorce, a beneficiary becoming vulnerable. Often life events that, that we can't often control ourself. Discretionary trusts give an element of adaptability within those circumstances.

So we've covered the difference there at the high level between bare trusts and discretionary trusts. But one of the other key questions is how are they taxed? And at a high level, it often comes down to who's treated as owning the asset for tax purposes. With a bare trust, it's fairly simple for taxes, it is really the beneficiary that's been deemed to own the asset, right? And that means income tax is going to be taxed at their rate. Capital gains are also assessed on them and not the trust.

From an IHT perspective, the gift into bare trusts are potentially exempt transfers, so it can fall out of the estate after seven years. If we compare that to a discretionary trust, it becomes a little bit more complex in these scenarios because here the trust itself is taxed. From an income tax perspective, there is a, there is a £500 allowance, probably I would say only a £500 allowance, anything above that is taxed at that trustee rate of up to 45%. From a capital gains tax perspective, the trust has a much lower exemption £1,500 exemption, and gains above that are taxed within, again, the trust. From an IHT perspective, this is actually now a chargeable lifetime transfer, not a potentially exempt transfer. So, what that means is that there is a potential for periodic charges every 10 years and exit charges when the money comes out of the trust.

So, if we step back for more bare trusts, I would say can be simpler and more tax transparent discretionary trusts, yes, give a lot more flexibility and control, but they can often have a bit more rigorous or more complex tax regime. Now, if we overlay protection onto this, well, in both bare and discretionary trusts, income tax is only going to be relevant if the trust is generating income, which means it's holding income producing investments.

In most protection cases, where the only asset is a life policy with no cash-in value, there isn't going to be any income. So, income tax shouldn't be an issue, and it's also not a concern from an income tax perspective if it's a family income benefit policy because that's not deemed to be classed as trust income.

Again, capital gains tax generally only triggered where that asset in the trust is sold, transferred, and it's gone up in value. Life policies, even investment linked ones, don't typically attract capital gains tax whilst in trust. So, unless you're dealing with gifted shares or property, again, not typical in protection advice, capital gains tax isn't usually a concern.

Inheritance tax, however, is probably one of the areas where protection advice is a key area to consider because a donor will have a cumulative nil rate band of course, £325,000 applied across all chargeable lifetime transfers, including any relevant property trusts that they create. When that new trust is established, the available nil rate band is reduced by any chargeable lifetime transfers made in the previous seven years, including amounts settled into earlier trusts. In the case of joint donors, then such as with joint life second death and whole of life policies, each of those donors is going to be treated as making a separate transfer and applies their own nil rate band to their share.

The nil rate band available at outset, therefore, actually here determines whether an entry charge applies. And for ongoing periodic charges, the nil rate band that's applicable at the time of the charge is used. Now, here, the use of multiple trusts under Rysaffe planning is actually quite relevant where larger protection policies are being used, and this is really where that key protection opportunity sits. Particularly where the potential value of the policy proceeds could exceed that available nil rate band.

For your smaller policies where the value of the transfer is generally seen as being within the nil rate band of the trust. The benefits of establishing multiple trusts are fairly limited. However, those higher sum assureds using those separate trusts can actually help manage how that chargeable lifetime transfer is actually measured and prevent hopefully some unnecessary aggregations into that single transfer approach.

So, it can be particularly relevant where clients are maybe looking at those larger policies or maybe setting up the multiple policies over a course of a period of time. And again, helping to hopefully manage some of those conversations from a tax perspective opens up that avenue to bring protection into the equation.

Now, one of the other areas I want to look at from a relatively technical perspective is the phrase defining benefits and discretionary trusts that are used for protection plans define various protection benefits into three categories. You've got gifted benefits, retained benefits, and personal benefits.

So, the terminology is widely used across insurers and within their trust deeds, and it can actually differ between insurer as to what type of cover sits underneath those benefits. So that's really the reason that I'm mentioning it today.

So gifted benefits, these are benefits that are paid to the trustees to be held for the benefit of the discretionary beneficiaries. So, for example, at Royal London, we would classify gifted benefits as life insurance or terminal illness benefit.

Retained benefits, so these are different. These are types of covers where the trust keeps these for the benefit of the donor or donors, but they may have the option to make them a gifted benefit. And these are things like critical illness or total permanent disability benefit with Royal London.

The third category is personal benefits. So, these effectively bypass the trust and will always be paid to the donor. Now, some examples here are things like income protection, children's critical illness cover, fracture cover, and various other wider benefits that might come within the plan.

Okay, so a few technical areas to, just to think about there from protection perspective. But in terms of who are we actually going to be dealing with a trust. So, there are three main parties to a trust. The person who sets up the trust is known as the settlor or the donor. And at Royal London, we use the phrase donor. Sometimes you might see the phrase settlor used. The trustees, so in the middle at the bottom there, these are the people that are going to be the legal owners of that trust property. They are responsible for looking after the trust and distributing any of the benefits from the plan to, to the beneficiaries, hopefully according to what's within the letter of wishes. I would say here it's quite an important thing, and fairly an obvious statement to make as well, but the donor should be choosing trustees that they trust implicitly.

And the ultimate goal here is that those properties, the funds from that trust, are going to the beneficiary or the beneficiaries, the people that are going to benefit from whatever it is we're putting into trust.

Now the next few slides I've put together some of the areas that we get a lot of questions. So, I would say some of these points are probably some of the most commonly asked questions with regards to those three roles, the donor, the trustees and the beneficiaries.

So, I want to start with the donor. So, they will automatically be a trustee and there must be at least one additional trustee for that trust to be effective. Within a Royal London trustee, you can actually name an additional four trustees. We're going to look at that letter of wishes again a little bit later on, but for a discretionary trust, I would say it's really good practice to have the donor write that letter of wishes for the trustees to know what the trustee role that they're playing is there to do and how the donor wants them to distribute those benefits from that policy.

The donor should sign the trust form either physically or digitally. We will need to have a copy of the signed trust form. We'd always say the original needs to be kept with the plan documents and any other trust papers. I've not included it on this slide, but I am frequently asked about joint trusts and jointly owned policies. So, by default, with our discretionary trust, if there are two donors on the trust, then the gifted benefits will be held for the absolute benefit of the surviving donor, provided that they survive either death or terminal illness of the other donor by 30 days.

There may be situations where the donors don't want the survivor to benefit for example, if it's a joint life second death policy. Now, in this case, they can actually exercise an option that will allow the gifted benefits to be paid directly to the trustees, even if one of the other donors is surviving, and then they'll be held for the benefits of the discretionary beneficiaries.

The trustees, an important role. We can all agree on the fact that the trustee role is a very important one. But who do we actually want to appoint as a trustee? Well, as I said a second ago, they really need to be trusted. If you don't trust them to water your house plants while you're away on holiday, possibly not a good idea to have them as a trustee for your life assurance. Now, they don't need to be professionals. However, nominating a professional trustee such as a family solicitor can offer the benefit of that independence and maybe that individual that's maybe out with any family situation can be quite useful where there's maybe blended families, maybe more complex family setups. That, I would say, also does need to be weighed up with the fact that with a professional trustee, they are likely going to charge for that service.

Now, under English trust law, trustees need to be at least 18 years old. While there's no maximum age, I would say it's worth reminding clients that they, as the donor, need to still consider the age of the trustees. Because actually, appointing a trustee that could die before the donor is probably something that they don't want to happen.

I mentioned a moment ago that whilst the donor will automatically be a trustee, there must be at least one additional trustee for the trust to be effective. Now, that's because two trustees would usually be required to pay out a claim in the event of one or both, assuming it's a jointly owned policy die.

Now, it might again seem like another obvious tip here, but we do see this question coming in to our technical team fairly frequently. But make sure the clients have been informed that they're nominated or at least make sure the clients are aware that they have informed those that they are nominating as a trustee of their appointment probably before they're nominated on the trust form. And we'd always say the trustee should be provided with a copy of the trust form as well.

Now, the question about overseas trustees comes up quite frequently. Now, whilst it is possible to appoint overseas trustees, it is worth bearing in mind that there could be delays from an admin perspective if trustees are based over different time zones, there could be potential delays for them acting as a trustee.

It could particularly be a bit of a point of sticking where there is paperwork that needs, maybe needs to be sent to other parts of the world. And again, if we're dealing with multiple countries, multiple time zones, that could take a fair amount of time. For example, if the donor is a UK resident, appoints an overseas trustee again, that individual could be based over multiple time zones.

There could also be different tax implications to bear in mind here as well. So, if the trust in the future maybe becomes a non-UK resident trust, that could change how that trust is viewed from a tax perspective, looking at some of the points we, we highlighted earlier. So, if we have a donor that's in the UK, so a UK resident, and appoints that overseas trustee during the life of the donor that trust will be a UK resident trust. However, on the donor's death, that trust would become a non-UK resident trust if the only sole trustee left was based overseas, and therefore there could be additional tax implications. I would always recommend and suggest that specialist advice is sought if there is a concern about that happening.

The other thing just thinking as well, now this has come up a few times even over the last few weeks with regards to trustee bank accounts. So, it's not necessary to actually always have to set up that trustee bank account. All trustees can actually direct us to pay one trustee, and in some cases even to a beneficiary. And if all the trustees request us to pay one trustee's bank account, then that trustee does need to be able to keep the trust fund separate from their own personal funds. But again, it does mean that there's not always the instance that that individual trustee bank account needs to be set up.

Lastly, some considerations here when it comes to beneficiaries. So again, an obvious statement to make, I've got a few of them today. But the donor cannot be named as a beneficiary, otherwise that trust is not going to be effective for IHT planning. If it's a bare trust, the beneficiary does need to be named at the outset. They cannot be changed later on. And the beneficiary can be a trustee, provided that they are over the age of 18 and of sound mind, but they do need to act impartially as well. Now, if a discretionary trust is used, as we've said a few times already, there is going to be that list of potential beneficiaries that can benefit from the trust funds.

Now, what I've got on screen just now is a screenshot of the Royal London discretionary trust within the list of potential beneficiaries that the trustees can appoint the benefits to in their favour. Now, it's a fairly broad list. The idea is that it covers most of life's major relationships without having to update the trust every time something changes.

Now, do most discretionary trust beneficiaries actually cater for a modern family structure? Well, we are seeing more and more people live in cohabiting relationships, so living together with or without children but not married. A change that we made to our discretionary trust a couple of years ago now was actually the inclusion of cohabitees as an individual named within our discretionary beneficiary list. So what that means, the trustees can now appoint the trust benefit to cohabiting partners unless in instances where they're not specifically named, so hopefully helping cater for that more modern family structure.

So I'm going to take a quick look now at the Trust Registration Service, really because it is an area that again, we're seeing a lot of questions come up from advisers. And in the protection space, a lot of queries around whether or not it applies to trusts that are being used for protection policies.

So, I suppose just a bit of background. The Trust Registration Service, it was introduced a few years back now by HMRC really to try and improve the transparency of trust ownership and tax compliance. So just to put the Trust Registration Service into context, it's an online registration service that was brought in under the anti-money laundering rules to help improve transparency around who's involved in trusts. Now, the good news is, from a protection perspective, most trusts that we use don't need to be registered straight away.

Now, that's because there is a specific exemption where the trust holds only a protection policy that pays out on death, terminal or critical illness, disability or to cover various healthcare costs. Now, that can even include multiple policies in the same trust. As long as they meet those needs and those conditions it will apply, they'll be able to be eligible for that exemption.

Where it does become particularly relevant is if the trust holds anything else, like an investment bond or other asset, because then the exemption falls away and that registration is required. There are several other trusts that if they do meet certain conditions that they can become exempt. But from a protection perspective, that's the key thing that we need to think about.

There is another trigger point where the Trust Registration Service and protection plans that are used in trust can become a point of consideration. So, it’s when a claim happens. For a death claim, there's actually a very useful two-year window where that trust can still remain exempt while the trustees distribute the proceeds. But for any other claims, like a critical illness claim or wherever the money's paid into the trust, it usually needs to be registered within 90 days. So, if it's a critical illness claim and the money's paid into the trust, it does have to be registered within 90 days, unless it's paid directly to the beneficiaries, in which case that trust never holds the proceeds and it stays outside of the TRS.

And I suppose that point on there, any trust that does have a current tax liability already needs to be registered or will need to be registered within 90 days of that tax liability arising in the future.

Okay, so right at the start, if you can remember back that far, we did look at where the benefits from a life policy go. Where does the direction of those benefits go? And I suggested there is a fairly new contender for where policy benefits are directed, and it's called beneficiary nomination. It is now available from a small number of insurers, including Royal London, and it can be a simpler way of helping clients achieve some of those objectives that we looked at earlier, right time, right money, and right hands.

So, if we take a look at what exactly the beneficiary nomination is, so as I said we're bringing this other option into the mix. When we start bringing in this other option, I certainly get asked a lot of questions around, well, why would you use beneficiary nomination over a trust? When would you use a trust over beneficiary nomination? Very, very valid points.

I would say beneficiary nomination is a suitable option for clients whose situation might be more straightforward. For complex estates, for example, for blended families, tax planning situations that may be more detailed and more complex, there'll be cases where there are very young beneficiaries that payment to their parent or legal guardian is wanted, sometimes that trust can offer an extra layer of protection. But of course, we can advise a client, and each solution is going to be very much different.

But we do offer beneficiary nominations as that simpler alternative to a trust. And it's available on our individual personal menu life cover, life or critical illness and whole of life plans as well. It's essentially a way of allowing a plan owner to nominate who receives their payout if there's a claim paid after they die. And what it does is it lets clients, during the application, name up to five individuals that they want to receive any death benefits. Now, it’s only individuals that can be named, so they can't name a company, they can't name a mortgage lender, they can't name a charity or their estate. It is only individuals that can be named.

That flexibility option sits within here as well because clients can actually update and change their beneficiaries at any time. We'll remind clients yearly that they can change their beneficiaries. And whilst they can change their beneficiaries to somebody else or write the plan under trust at a later date, so keeping that trust option open, they cannot remove all the beneficiaries entirely. That's because once the client has decided to nominate a beneficiary, it must not be possible for that plan to come back into their estate.

Now, those death benefits that are paid out under beneficiary nomination don't count towards the deceased estate for IHT purposes. We also need to see a grant of probate or confirmation before those benefits are paid out. So ultimately, it gives those right hands, right time, right money objectives and it gives us the option of being able to meet them, ones that we mentioned earlier on.

Now, if the beneficiary is under 18, then we'll pay the benefits to the minor's parents or legal guardian that will then be responsible for managing the funds until that individual reaches age 18. And if your client wanted to retain term of those benefits, which remember is a gifted benefit with Royal London's trust, then beneficiary nomination would allow them to retain that benefit. So again, it's another option for clients that want to be able to access that terminal illness benefit.

There might even be scenarios where clients are still considering a trust. Maybe they need more time to speak to the potential trustees. Beneficiary nomination could be a way of really being a gap filler, to put it one way between the policy going on risk and that trust being set up further down the line.

On the other hand, when might a trust be of consideration? So, a trust is absolutely still an option. It hasn't gone away anywhere. We're just effectively creating another option where maybe a trust isn't going to be used, isn't a consideration, or might even be a barrier to the protection that is taking place.

So certainly, for your complex cases, maybe your less straightforward situations or cases, maybe where there's young beneficiaries that perhaps need additional control over how and when those funds are paid out. Maybe your blended families, where there may be additional consideration around particular members of the family getting the funds and under certain situations.

Of course, your joint life policies again, aren't going to be eligible for beneficiary nominations, so really trusts would be the option there. Trusts, I think ultimately give an extra level of flexibility when it comes to IHT planning. So, for example, if clients wanted to utilise facilities like distributing the capital out from the trust as a loan, maybe skipping various different individuals and generations to help with that later life planning, that estate planning needs the clients have. And trusts give a really good sense of control in those instances.

So, it's not about there being a right or wrong option. I would say it's more about having the right tool for the right job.

So, the last part I'm going to touch on beforehand over to Fiona is looking at a few ways that hopefully we can help build trusts into your everyday advice. So, I've mentioned letters of wishes a few times today. Just a bit of a recap as to what exactly it is I'm talking about when we mention letter of wishes. It's really a non-binding guide for the donor to the trustees outlining the donor's wishes for how the distribution of that trust property should be considered by the trustees.

Now, it's not a legal instruction. The trustees aren't bound by the letter of wishes. However, unless there is good reason not to, it would be unusual for a trustee not to take into account the details of a letter of wishes.  On screen, you can see a template. You can access this, this is a Royal London template. But again, you aren’t bound to use the letter of wishes from our Royal London template here. It's just an option that I thought I would share with you.

Now, I mentioned earlier that we are seeing hopefully more conversations, but we're certainly seeing a growth in conversation happen around trusts and hopefully that exacerbates even from today. For anyone that has read the FCA's Pure Protection Market Interim Report, you probably will have picked up on the fact that there was reference to trusts in the report by the FCA, in particular reference to the fact that they really see trust as being a key part to making sure that protection policies do what they're meant to do at that point in time when a claim happens on the policy.

So, it's very much, I would say, clear the FCA have an eye on trust usage. Now, I want you to paint a, maybe a common scenario in your head. You've done the protection recommendation, you've found the right solution, you've explained how it works. Now the discussion comes up about putting the policy in the trust or maybe nominating beneficiaries, but the client hesitates.

Maybe they're not sure about named beneficiaries. Maybe they're not sure about the trust. Maybe it feels like a lot of legalese. Maybe it's something they'll do later. Imagine if you handed them this disclaimer, a very simple note, maybe that read something along the lines of, "I understand that contrary to the advice that we've received here, I don't wish to put my life insurance into trust or nominate beneficiaries," and it spells out clearly the implications that decision might have.

Now, if you were the client, would you sign it? Because I reckon most people wouldn't. This isn't about pressuring a client, it's about creating clarity. These disclaimers, I would say, serve a couple of purposes. It helps the client understand the risk of inaction, doing nothing, and it gives you a clear audit trail showing that the advice was given, but potentially not followed.

So last and certainly not least from myself, a few things just in terms of top tips to taking away trusts and bringing them into your business. Think about trust as being essential to that policy, essential to making sure that the direction of those benefits is clear and set up from the beginning. It's not an optional extra.

Engage with the trustee. We've got some guides to help you have more thorough conversations with trustees about what their role is and the expectation of the trustee. But engage with them, and they actually could be a future client of yours as well.

Think of beneficiary nomination. Always, you know, we always have thought about trusts, maybe life of another or the estate as the go-to direction. But remember there is this alternative now, beneficiary nomination for some of those more simpler cases.

Offer a Trust Review Service. Have a look through existing clients. If you've got clients that have existing policies but aren't in trust at the moment, consider writing those existing policies into trust where appropriate. And trusts and beneficiary nomination give a fantastic opportunity for you to reach out annually, regularly to clients, remind them of the fact that the policy is in trust, remind them about their letter of wishes, is it up to date? Are they happy with what it states? Make sure their beneficiaries are alive, they're still comfortable with who those beneficiaries are. So, it really does offer a really good opportunity to regularly engage with those clients.

Now that's really it from the first half of the session. That's it from my session on protection. So, I'm going to hand over to Fiona. So, Fiona, over to you.

[39:44 -57:17] Fiona Hanrahan

Thank you so much, Gregor. I enjoyed that, I hope you did too. Now I'm going to move on from protection and talk about setting up a trust to receive pension death benefits, and you might have clients who've already done this, or you might be thinking about it.

I'm going to talk about the circumstances you might consider setting one up, how it would differ from an income tax point of view in comparison to pensions, and how the inheritance tax changes coming in April 2027 will affect this decision, and I'll use a case study to help.

So why would you use one? It's probably worth quickly recapping how it would work first if you didn't use a trust. When someone dies and their pension beneficiaries receive pension death benefits, assuming we're not talking about defined benefit here, it's up to them how they take those benefits, assuming there is a choice; annuity, drawdown income or lump sum. And if drawdown is chosen, it's up to that individual, the recipient or the beneficiary, who receives any benefit from when they die.

So, in this respect with pensions, the original member, who worked hard to accumulate that pension fund loses that control. In other words, your beneficiaries can spend that pension on what and when they like and can leave it to whomever they choose. If there is a non-standard family set up, for example, a couple with children from previous marriages or children together plus stepchildren, a trust might make sense.

If the pension holder dies, they could have the benefits paid to a trust. The trustees would then follow their wishes, through that letter that Gregor talked about, which could be that the wife or spouse receives an income from the pension during her lifetime. Then on her death, it's split between the children and the stepchildren. And remember, that couldn't be guaranteed under the pension route as when the wife receives the funds, she could leave them to whoever she chooses, or she could take the full fund as a lump sum and do whatever she likes with it immediately.

When it comes to inheritance tax, let's assume we're talking firstly about a death before April. The funds could pass to the trust, and then they're not in anyone's estate, so escape inheritance tax after that point. After April, inheritance tax might be due on the first death but not afterwards when the funds are in the trust. In theory, under the pension rules, inheritance tax could apply on the death of the member and any subsequent beneficiary after April 2027 too.

Next, if the beneficiaries are young, let's say 19 or 20, receiving a large pension fund might not be in their best interest. It depends on their personality I suppose. A trust could be used to provide an income while they're at university and then a lump sum at 30 or whenever they want to purchase a house. Remember, that couldn't be guaranteed under the pension route. Finally, a trust could provide the option to loan money to beneficiaries, which could be repaid potentially on that beneficiary's death too.

So how does it actually work with pensions? I've replicated the slide that Gregor used here. If you do choose to set up a trust during your lifetime to receive pension death benefits when you die, it works just really like any other trust, certainly at least initially. Remember, you have to set up a trust with something. So, whilst that's not a protection plan here, we normally recommend £10. So, you as the settler or the donor gifts £10 to the trust, and that £10 just stays with the trust. It doesn't go to the pension provider, and it's not paid to the beneficiaries at this point.

You would appoint trustees, people you trust to fulfil your wishes, and then that trust just sits there until you die, when the lump sum death benefits from your pension would be paid to it. At this point, the funds would leave the pensions world and become trustee investments. Initially, the funds would probably be paid to a trustee bank account with potential investment to follow depending on, you know, what was happening.

Alongside the trust, you could write that letter of wishes that Gregor talked about expressing what you want to happen. For example, an income paid to age 25, no access till 30, an income to a partner, and then the remainder paid on their death to stepchildren, etc.

The type of trust would normally be a flexible or discretionary trust. Sometimes they might be called pilot trusts or bypass trusts. You might have heard those phrases from other providers.

No one beneficiary is entitled to the benefits, which means they're not in their estates when they die. So, this is where the potential inheritance tax advantage comes when a potential beneficiary dies. As part of the pension process, you would state on your expression of wish form that you would like the lump sum to be paid to the XYZ trust or whatever you've named it. And if you choose at a later date that the trust is no longer required, for example, the beneficiaries are older, you can simply complete a new expression of wish form and name individuals on the form to receive pension benefits, so we're staying in the pension world in that respect.

In theory, the trust still exists because remember you've set it up with £10. If you want to bring the trust to an end, you could give that £10 to a beneficiary, and the trust would come to an end because there's nothing in it. Or you could leave the trust, as it is if you want to make further gifts to it in the future.

And Gregor talked about the Trust Registration Service trusts which hold assets with a total value of £100 or less, which were already in existence before the 6th of April 2020 are excluded from this service. Both these requirements need to be met. So, if you were adding funds after the 6th of April 2020, that would remove that exclusion if the assets exceed £100, which presumably they would after someone dies and those death benefits are paid. There's no exclusion for these types of trusts holding, for example, that £10 when they were created after the 6th of October 2020. They would need to be included on the register.

So, let's move on and have a think about how the tax would work. We'll cover off what would happen both if death occurred before and after the 6th of April 2027, when, in theory, inheritance tax could apply. And I think you'll see that trusts wouldn't be set up for any tax advantages, at least on that first death. They would be set up more for reasons of control. So, before the 6th of April 2027, if someone dies, and they died before the age of 75, the lump sum would pass to the trust income-tax-free if it's within the available lump sum and death benefit allowance.

Now, this is currently £1,073,100, and it could be higher if the member had lifetime allowance protection or lower if they've taken some tax-free cash during their lifetime. If the lump sum paid to the trust is above the available lump sum and death benefit allowance, the excess would be subject to the trust rate of income tax, which is 45%.

If death occurs after age 75, the special lump sum death benefit charge is deducted by the provider on the full amount before paying the lump sum to a trust, and that's also coincidentally or confusingly 45% too. And this tax charge is available as a tax credit when the beneficiary ultimately receives funds from the trust.

For example, if they received £55,000 from the trust, this would equate to them receiving £100,000 with a £45,000 tax credit or tax deducted. If they were 20% taxpayers, they could get to reclaim that £25,000, meaning they effectively paid 20% or basic rate. And high-rate taxpayers could reclaim that £5,000, meaning they effectively paid 40%. Additional rate taxpayers wouldn't get to claim any.

So, in this respect, the beneficiary has paid the same rates of income tax on death after age 75 as someone receiving benefits directly from the pension. In both situations, the marginal rate of income tax has applied. But, and it's a really big but, the fund under the trust route would've taken that massive hit of 45% affecting fund performance, obviously, which it wouldn't under the pension route. I guess it would depend on how long the funds were planning to be invested under the trust route, whether that's an issue or not.

So how would the tax work after the 6th of April 2027? Income tax will remain the same as the special lump sum death benefit of 45% would apply as well. But if inheritance tax is due, this is calculated before any income tax is due or paid. The amount that would be classed as being in the estate is the amount immediately before death, so before any tax charge of 45%, for example. So, like under the pension route, inheritance tax plus income tax could be due. The election to have the provider deduct and pass on the inheritance tax charge will avoid any overpayment of income tax and the trustees needing to reclaim.

So, I think, it's worthwhile if we look at a case study, so I'd like you to meet Julie. She's 75 and in income drawdown. She's got two children with her current partner, they're not married, and she has two from a previous marriage as well. Now, a while ago, she set up a flexible trust to receive pension death benefits when she dies, and this was set up a number of years ago with that family situation in mind.

She spoke to her financial adviser, and while she's happy for her partner to receive income from her pension whilst he continues to live in their house, she does not want her two children from her previous marriage to be ignored. Remember, that couldn't be guaranteed under the pension rules.

Her intention is that he continues to receive an income, then any remainder when he dies gets shared amongst the four children. So how would the tax work before the 6th of April 2027 then? Let's assume Julie dies before April when those changes come. And let's assume there's £400,000 in her funds, and as she dies after the age of 75, the provider will deduct the special lump sum death benefit charge of 45%, so £220,000 will be placed in trust.

If one of the beneficiaries takes their quarter, or £55,000, this will be classed as a gross payment of £100,000 with a tax credit of £45,000. If the beneficiary is a higher rate taxpayer, they will be able to reclaim £5,000, meaning they effectively receive £60,000 or have effectively paid 40% in tax, which is their marginal rate, which they would have paid under the pension route.

Now let's assume Julie dies after the inheritance tax changes come in April 2027, and again, there's £400,000 in her fund. This time, inheritance tax plus income tax applies, and let's assume that inheritance tax rate is 40%. So, the amount before the special lump sum death benefit charge this time is £240,000. The inheritance tax charge is deducted by the provider and passed to HMRC. And as Julie died after the age of 75, that 45% lump sum death benefit charge is also deducted. Means that this time, £132,000 is paid to the trust. And again, if one of the beneficiaries takes their quarter or £30,000, this is classed as a gross payment of £60,000 with tax deducted of £27,000.

The beneficiary gets to treat this, again, as a tax credit. If they're a higher rate taxpayer, they get to reclaim £3,000. This means the beneficiary effectively receives £36,000. This is £60,000 less higher rate income tax of £24,000.

So just to recap then, what does the beneficiary receive? If Julie dies before the 6th of April 2027, when no inheritance tax would be payable, a higher rate tax paying beneficiary would receive 60% of their share. So, in our case study, each was receiving a quarter, so 60% of a £100,000 is £60,000. They would actually have received £55,000 and claimed that extra £5,000 as overpaid tax.

After the 6th of April 2027, assuming inheritance tax applies of 40%, we're now looking at a quarter of £240,000 after inheritance tax with higher rate tax to pay, so £36,000. They would actually have received £33,000 and claimed that £3,000 as overpaid tax. Remember, though, that through the pension route, the beneficiary would be paying inheritance tax plus income tax on death after age 75 too.

Now, what about tax when it's in the trust? Gregor covered this off. Remember, the trustees will be acting in the interest of the trust beneficiaries, and they're responsible for ensuring all trust taxes are calculated, reported, and paid.

In our example, we had ignored any fund growth whilst it's in the trust, but any investments would be taxed at the trustee rates of 45% or 39.35% for dividends. Remember, at this point, it's left behind that virtually tax-free growth which pensions enjoy. Any capital gains tax would be 24%. As with other trustee investments, periodic and exit charges could apply. Remember, these won't occur whilst the trust only has that £10 in it during the lifetime, but then it'll depend on how long the trust continues after receiving the funds after death whether these charges will apply.

And complications can arise around the calculations of periodic and exit charges, particularly where pensions have been consolidated. This is because the anniversary date for the purposes of the charges will be the date when the member first joined the pension scheme, not when the trust was set up. And that would be the case if it was a trust-based scheme, and I know that language is confusing. And as you can imagine, will get trickier if there's more than one scheme. Contract-based schemes won't have this complication. At the moment, there's no inheritance tax entry charge to pay, but after April 2027, we're looking at potentially 40% that could apply.

So, let's go back to Julie then. Julie was considering her options as she recently turned age 75. She was thinking about that 45% tax charge that's now going to apply on death. She had a discussion with her adviser about the merits of the trust now that she has turned age 75, and that special lump sum death benefit charge applies along with inheritance tax after April 2027. Remember, she's not married.

Inheritance tax will apply to her pension death benefits anyway, so that doesn't impact her decision about the trust. She decides to keep it the way it is. The reasons for setting up the trust still remain. She wants her partner to receive an income from the trust, then any lump sum be paid when he passes away shared amongst the four children. She's going to revisit this decision if he predeceases her, and that tax charge of 45%, she has learned, is not as bad as she first thought because the beneficiaries get to treat it as a credit.

So, thinking about some planning points then when it comes to using trusts for death benefits and pensions. Firstly, keep up to date with the changes, particularly when it comes to inheritance tax. Make sure expression of wish forms always reflect the most up-to-date wishes and cover this off at each annual review. This will speed things along and ensure the member's wishes are actually followed at the right time.

If a trust has been set up, think about if it's still needed or if it's appropriate. For example, are those young beneficiaries now older? Has a spouse or partner predeceased the member? Have the funds been depleted and it's no longer required?

Remember, a trust set up to receive death benefits can be set aside simply by completing a new expression of wish form and naming specific individuals and keeping your death benefits paid within the pension rules. If a trust is not required or set aside, remember, drawdown can only be offered if that scheme actually offers it. It's too late after someone dies to find a scheme which offers beneficiary drawdown without being in beneficiary drawdown first. Making sure this is an option whilst the member is still alive is vital to ensure that the beneficiaries have those full options. It can mean the difference between a tax charge applying and not applying. And along with this, it's vital to ensure that the expression of wish form is completed correctly to ensure that beneficiaries have that option of drawdown too.

So here are our learning outcomes, I hope you feel like we have met them. And remember, as Gregor said, that your CPD certificates will be sent to you by email after the webinar and may take a little time to arrive. During this time, there's no need to let us know that you haven't received your certificate. It will be with you soon and thank you for your patience.

And there's our legals, I'm sure you wouldn't want to miss them. And please look out for our next webinar, where we're going to talk about the state pension.

Thanks very much.