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What is a trust?
A trust is a way of making a gift, whilst maintaining some control over who benefits from it and when it becomes available. Rather than the gift being passed directly to the intended beneficiaries, it is transferred to and held by people known as trustees. The gift can be anything from a house to a life insurance policy. For the purpose of this article we will only consider life insurance policies or combined life and critical illness policies.
What is required to form a trust?
There are four key parts to a trust: -
Settler Customer or owner of the life insurance policy.
Trust Form The legal document which formulates the trust.
Trustees Key individuals appointed to by the settler as trustworthy to ensure the settlers wishes are acted upon.
Beneficiaries The individual(s) who will benefit from any proceeds.
A trust form may also require a witness to counter sign each of the sections.
Why use a trust?
If you already have a life insurance policy then you have already considered that your loved ones/dependents are looked after should the worst happen to you. However, it is worth considering following two scenarios: -
Yourself and spouse have a joint life policy protecting your mortgage, the policy will payout proceeds to cover the remaining balance of the mortgage on death of the first life. The proceeds will be paid to the remaining spouse. However should something happen to both lives the proceeds will be paid in accordance with the estate, and a beneficiary may not be willing to settle the mortgage/loan debt, the estate may not have a 'last will and testament' and rules of intestate may apply causing delays, and the policy proceeds are split amongst the relatives of the deceased.
You have taken a level term assurance policy protecting your family of common law husband/wife and two children. You have a 'last will and testament' in place but the policy plus estate are over the inheritance tax threshold. The estate will require an investigation looking at assets, debts, gifts within the last 7 years. Forms will need to be completed including PA1, IHT400 and IHT410 since the estate + policy is over the threshold. The Inheritance tax will bill will need to be paid first as the policy proceeds can not be accessed yet, this could force sale of asset or a loan to be taken. A probate interview and payment of £90 will be required prior to grant of representation issued all before the proceeds paid to spouse as the representative. If there was no 'last will and testament' in place the remaining spouse could not have applied for letters of administration or received any part of the estate including the life policy proceeds and will need to make a claim for a share of the deceased estate under the Inheritance (provision for family and dependents) Act 1975 obviously this will incur legal costs.
There are many more scenarios than the two outlined above and independent advice is recommended to ensure you have your life policy setup correctly.
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