Trust plan can be a winner but you must seek proper advice

Published on Friday 27 March 2009 20:00

QWhen taking out a new life insurance policy, I noticed on the application form that I could have the policy written in trust. What does this mean and why might I choose to do this? TL Livingston

AA trust is a separate legal entity that has trustees and beneficiaries. Property is transferred by the settlor – you in the case of this life policy – to the trustees, who then hold the property in the trust for the benefit of the beneficiaries. You, as settlor, will name your trustees and beneficiaries.

Essentially, the form is asking whether you want the life policy to pay out to you or for the proceeds to be paid to the trustees of your trust. By ticking the box to write the policy in trust or having a trust deed prepared by your solicitor that more accurately addresses your circumstances, you would be assigning (or transferring) all your rights under the policy – primarily to receive the payment from the life company – to your trustees. When the policy pays out, the proceeds will then be paid to and held by your trustees and can be given to your beneficiaries.

From the information you have provided, I do not know what type of life insurance you are applying for or for what purpose. Both of these factors will impact on whether or not it would be advisable for you to write the policy in trust, as will your individual financial and personal circumstances, tax considerations, expense and ongoing trust administration. Therefore, you should discuss the specifics of your policy and circumstances with a solicitor or financial adviser who deals with such matters.

In general terms, one of the main types of insurance policies that it is usually sensible to write in trust is a whole-of-life policy that is designed to provide proceeds to pay an inheritance tax (IHT) liability. As the purpose of such a policy is to provide funds that can be used to pay IHT, it is vital that the policy proceeds themselves do not create an additional tax liability. If such policies are not written in trust, the amount paid out could potentially be added to the other assets the policy holder owned at death and IHT charged on the total amount, subject to the operation of the nil rate band.

If the policy is written in trust, the funds will not be paid to the policyholder or his estate and will instead be paid to the trustees. This ensures that the proceeds will not form part of the policy holder's estate for IHT purposes. The funds, once in the trust, can then be used to pay any IHT and, if there is a remaining balance, this can be divided between some or all of the beneficiaries as the trustees decide. You, as settlor, can leave a Letter of Wishes for the trustees outlining how you would wish any such balance to be divided.

1.9 billion of "unnecessary" IHT was paid by UK taxpayers last year and research shows that the main cause of this is the inclusion in personal estates of the proceeds of life assurance policies, which if written in trust, would not be subject to IHT. Whatever type of life policy you are applying for, and particularly if it is a whole-of-life policy in connection with a potential IHT liability, you should discuss whether you should be writing this in trust with your financial adviser or solicitor.

&#149 Glen Gilson is a partner and head of private client and financial services at HBJ Gateley Wareing. If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail]. This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.