The decision to choose the beneficiary of your life insurance policy is a crucial financial decision that you will make. Also, you should consider how to do so without having to pay a large inheritance tax bill. Placing your life insurance policy in trust is one way to accomplish this.
Life insurance in trust is an important strategy for protecting your family’s future if you die. Placing your policy in trust gives you control over how your beneficiaries receive their inheritance. Your life insurance policy is an invaluable asset. Learn what life insurance in a trust is, how it works, and what you should consider in advance.
What is a Trust
A trust is a legal structure that enables people to leave property to specific individuals, such as friends or family. Trustees could be friends, family members, or lawyers. Trustees manage trusts until they are distributed to beneficiaries, which can happen at your death or on a specific date, such as a child’s eighteenth birthday.
It is possible to “write life insurance in trust”—that is, place your life insurance policy within a trust. This strategy has a significant advantage because the policy value is typically not considered part of your estate.
How Does Life Insurance in Trust Work
Trustees oversee life insurance policies after death, ensuring that beneficiaries receive payouts if the policy is held in trust. Beneficiaries could include a charitable organization, your spouse or partner, children or other family members, or close friends. A trust beneficiary must be at least eighteen years old.
You have control over how the payout is handled because it does not have to be made at the time of death. For instance, if you decide to give your children your payout, you can designate an age at which they can get it. Life insurance in trust offers a significant advantage as the payout is not subject to inheritance tax for the beneficiaries. Furthermore, if they must go through a lengthy probate process, the money should arrive within weeks, not months.
Types of Trust in Life Insurance
There are various types of trust. The primary difference between them is the level of customization that is possible. The best type of life insurance depends on your specific needs and desired payout recipients. For instance, a flexible trust allows multiple beneficiaries to be designated and can be updated as circumstances change, such as when grandchildren are born.
In contrast, beneficiaries cannot be altered in a bare or absolute trust. If you have a joint policy, you may be able to use a survivor trust. Trustees will pay the remaining funds to a surviving partner if the deceased is not married or in a civil partnership. For this reason, they remain alive 31 days after the death.
How Do I Put My Life Insurance Policy In Trust
It helps to have decided whether you want to write the policy in trust and to have your trustees in mind before you get to this point. Typically, when you first go to purchase your life plan from an insurer, they will give you this option. In addition, if you change your mind after purchasing the policy, you can transfer ownership to a trust.
A financial advisor or solicitor may be required to assist you with the setup of an existing policy. If you own a home, money, or a stamp collection, you should consider putting your policy in a trust. However, trust isn’t for everyone. Choosing the best life insurance policy for you and your family necessitates careful consideration of all available options.
Benefits of Life Insurance in Trust
Placing a policy in a trust is a popular option for several reasons. Here are some advantages of creating a life insurance trust.
- Policy proceeds can be collected without probate, allowing for faster payout processing. Probate is the legal process of valuing and allocating assets after death. Also, it takes several months to finish, or even longer if there is disagreement.
- The amount paid out by your life insurance is exempt from inheritance tax.
- You can decide when your beneficiaries receive the funds; for instance, they can have to meet a certain age requirement.
- Your payout will not be applied to any unpaid debts.
- Insurance companies usually assist in establishing trusts, often through templates available on their websites, which is cost-effective.
Disadvantages of Life Insurance in Trust
The main disadvantage is that once established, changing a trust can be difficult. Generally, once a policy is placed in trust, it cannot be removed. However, it is occasionally possible to change a trust, though this can be dangerous.
There have been instances where people made changes to a policy in good faith and unintentionally nullified their coverage. Again, if you are unsure about writing a life policy in trust, consult a legal professional. Transferring a life policy into a trust may also have tax ramifications.
Transferring a life insurance policy to a new beneficiary and passing away within seven years of the original designation may result in inheritance tax. If the new beneficiary is not your spouse or civil partner, inheritance tax may normally be payable. However, if you live longer than three years following the change, the amount payable will begin to decrease.
Final Thought
The decision to set up life insurance in a trust is based on several variables. For example, if you want to leave your estate to your spouse or civil partner, you must first determine whether it will be subject to inheritance tax. A financial advisor or lawyer can help you determine whether life insurance in trust is right for you.