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Finance/Investing
Abstract
The majority of life insurance companies offer a service whereby the policy proceeds can be placed into a trust. The purpose of this article is to explain why it is important to write your life insurance policy into trust and why seeking independent advice is crucial in securing the welfare of your family.
What is a trust?
A trust is a means for passing a gist whilst still maintaining control over who benefits from it and at what time. Instead of monny trasferring directly to the beneficiaries, it is transferred to and held by people known as trustees. The gift can be anythng from a house or a life insurance policy. For the purpose of this article we will only consider life insurance policies or combined life and critical illness policies.
The fundamentals rewuired to form a trust?
There are four key parts to a trust, the Settler or the owner of the life insurance policy, the Trust Form itself a legal document which formulates the trust, the Trustees or trustworthy individuals appointed to by the settler to ensure their wishes are acted upon and finally the Beneficiaries or individual(s) who will benefit from any proceeds.
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, consider the following two examples: -
You and your partner have a joint life policy protecting the mortgage, the policy is expected to payout the proceeds to cover the oustanding mortgage debt 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 live together with two children but are not married and you have taken a level term insurance policy to protect your family. 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. Completion of forms PA1, IHT400 and IHT410 as the combined estate and insurance cover is above the inheritance tax threshold. The Inheritance tax bill will be due prior to any policy proceeds being paid out, this may result in forced dale of assets or a loan being taken out. 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 Will in place the widow would not be able to apply for letters of administration or receive any proceeds or any part of the estate. They would need to make a clain for a share of the deceased estate under the Inheritance (provision for family and dependents) Act 1975 and thus effectively taking their own children to court.
These two examples are the tip of the iceberg, there are many more scenarios particularly with todays complex family structures. Therefore it is extremely important to seek independent advice when taking out life insurance and the use of a trust can remove such heartache.
Copyright (c) 2010 Steve Wentworth
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Steve Wentworth formed his firm Wentworth Financial Services in November 2007 having been in the industry since November 2002. To see if you can have your Life insurance written in trust (http://www.wentworthfs.co.uk/insurance/written-in-trust.aspx ) or if you would like a free life cover assessment.
Read the original article in context at http://www.wentworthfs.co.uk/articles/life-written-in-trust-005.aspx
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