Blog

Getting insured allows you to safeguard your beneficiaries’ future in case anything happens to you. Your life insurance will pay out a cash lump sum or provide regular income to your loved ones if you pass away during the term of your policy. 

Usually, your beneficiaries will receive the proceeds of the policy in its entirety as there is no income or capital gains tax to pay. However, without careful planning, your family could be charged inheritance tax (IHT) on the pay-out. 

If the total value of your estate goes beyond £325,000, IHT will be deducted from your insurance pay-out at 40%. This means that for a pay-out of £100,000, your family will only receive £60,000 after IHT.

The good news is that there is an easy and completely legal way for you to avoid this tax charge. You can ensure that your beneficiaries will get the full amount by putting your life insurance into a ‘trust’. 

Writing Life Insurance In Trust 

Having your life insurance written ‘in trust’ means that you are entering into a legal agreement to transfer the ownership of your assets to a trustee. The trustee is someone you personally appointed to oversee the trust. It could be a family member, a trusted friend, or a solicitor. 

The trustee’s responsibility is to ensure that the assets indicated in the trust will go to your beneficiaries. 

It is important to remember that once you place your assets within a trust, they are no longer considered part of your estate. With this arrangement, the insurance policy will be handled separately from your actual estate. The latter will no longer be subject to inheritance tax, even if it is above the tax threshold. 

Steps To Take To Set Up A Trust

The process of putting your life insurance policy into a trust is quite straightforward. Some policy providers will offer it as an option when you take out the policy. Otherwise, you may ask them to send you the standard form for it. Make sure that you accomplish this document correctly, and then coordinate with your trusted advisor for the next steps.

You can put your policy into a trust at any time. Keep in mind, however, that writing your life insurance in trust is considered an ‘irrevocable act’. It cannot be undone, so you must think about what you truly want from your policy before proceeding. Ensure that it offers sufficient cover before you put it into a trust.

Advantages of Writing A Policy In Trust 

Setting up a trust may involve costs as well as tax charges for certain types, such as discretionary trusts. However, the benefits you and your beneficiaries can get from this will far outweigh these costs. 

Aside from ensuring your loved ones receive the policy pay-out in full, this also ensures that they will avoid the probate process. This is a typically lengthy process of dividing up your estate according to your will. As a result, your family will receive the insurance money as soon as possible. 

Conclusion 

Taking out life insurance can benefit your family in case a major accident happens to you. However, to ensure that they get the most of this, you must set it up properly. Writing your policy in trust is an easy yet effective way to avoid significant tax deductions and give your beneficiaries the full pay-out amount. On that note, you must also take specialist legal advice to make sure that you get the trust that is right for you and your loved ones. 

If you are looking for a financial adviser in Cardiff you know you can trust, look no further than Harry Robinson Wealth Management. We have one mission: to guide you towards a brighter future for your family and your finances. Get in touch today for a no-obligation health check and let’s create a growth strategy together. 

*Will writing and Powers of Attorney involve the referral to a service that is separate and distinct to those offered by St. James's Place and along with Trusts are not regulated by the Financial Conduct Authority.