Recommending a client writes their insurance policy in trust may well be one of the most valuable pi...
Recommending a client writes their insurance policy in trust may well be one of the most valuable pieces of advice an IFA can give to a client. The security that comes from having placed the policy in trust can help relieve some of the strain,during what is likely to be an emotionally fraught time.
A trust is a legal arrangement that allows people to choose who will receive the benefit of certain assets such as a an insurance pay out, for example without giving them immediate control of the asset.
The creator of the trust is the settlor; those people named in the trust who are to manage and deal with the trust are known as the trustees; and the beneficiaries are the people who will receive the benefit of the trust.
There are three main reasons why policies should be written in trust. First, the settlor maintains an element of control because they can choose who benefits from the policy. This can be important for the many people who do not make a will, as the assets would otherwise go straight into their estate on death where the rules of intestacy apply. This means that the process of establishing the beneficiaries, known as probate, may not always mean assets reach the right person.
The second reason is speed of access to the assets. If an asset is not subject to a trust and becomes part of the estate, it can take weeks or even months for the probate to be decided, but because trusts avoid probate and are not part of the legal estate the beneficiaries can gain access to the assets faster. Third, trusts can have major tax benefits, because if the assets form part of the estate and the estate is valued at over £234,000, then it is subject to inheritance tax, which means that 40% of the estate will go to the tax man.
Choosing a trust
Most life assurance policies can be written in trust, but there are a number of different types of trust and choosing which one is appropriate will depend on the personal circumstances of the client.
Unmarried clients, for example, should always write life assurance in trust, if they want to provide for their family after they die. This could potentially prevent the family losing a sizeable part of the payout to inheritance tax.
Most people are concerned that the money quickly reaches the intended beneficiaries, so they are spared further worries in the future. So a trust based around the settlors' family may be the best solution.
Mark Edwards, IFA personal market leader at Royal & SunAlliance, believes that this is a key factor in placing life assurance in trust, and not simply to avoid inheritance tax. He says: "Hardly anyone in the country pays inheritance tax, only a small percentage of the country will have to pay it, so it is not an issue unless you are wealthy."
Protecting the mortgage
Another area in which writing insurance in trust may prove invaluable is where it is used to protect a mortgage. Ian Smart, marketing technical support manager at Scottish Provident, says: "The family can repay the mortgage, and so there are no worries about losing the main income provider and then being repossessed. The tax aspects are not quite as strong, but the control and access aspects are still there."
But the relevance of protecting a mortgage through a trust depends on whether the life insurance is written under single or joint lives. Mike Turner, product manager, protection at Friends Provident, says: "You do not necessarily need a trust for joint life plans because they pay out to the survivor and the money is then theirs to deal with. The large majority is written on joint lives, but it is something that should be considered for single life policies. If you think that the average house is now worth around £100,000, you are already almost half way to the IHT threshold."
However, life policies are not the only insurance suitable for writing in trust. A split trust is relevant for protection policies that include both life and critical illness benefits, or indeed any other benefits. There are a number of different types of split trusts but generally the money can be paid out to the beneficiaries upon death while still allowing the client access to any critical illness benefits.
Smart says there are a number of advantages with placing critical illness in trust. He says: "When you are seriously ill it can be some time before you are well enough to deal with the finances, and it makes sense to appoint trustees to help you deal with the arrangements. The trustees can claim straight away and everything can be done in a timely fashion."
Other types of insurance that may be appropriate to be written in trust include long term care. Such a policy will pay out under the terms of the policy until death, but at the time of death the surrender value and outstanding payments will be placed in trust and then paid out to the beneficiaries.
Business trusts
In the business environment, writing insurance in trust may actually be just as important to clients, because making sure the money goes to the intended beneficiaries can often be even more complicated. With group life based around the partners in the firm, a trust can be established in which, after the loss of a partner, the benefits are paid to the trustees and then on to the beneficiaries. This means that the remaining partners can quickly get the money needed to purchase the deceased or retiring partner's share.
Edwards says: "The 'under trust' route is pretty flexible and is suitable for all sizes of partnerships. All policies are on an own-life basis, which represents their interest in the partnership. It is written in trust for the benefit of the others, and it does not go through probate."
Laura Shanks, product development manager at Scottish Equitable Protect, says that choosing a flexible trust allows the beneficiaries to change as the circumstances of the business change, which may also cut down the time spent waiting for the benefits. Shanks says: "A business trust on a 'revolving door scheme' means that you just state the beneficiaries job title rather their names, and means that you do not have to worry about changing partners."
But just as with personal insurance written in trust, there can be more complicated situations which require more detailed planning. Rod Macdonald, head of sales and marketing at Permanent, says: "If critical illness is involved it can get more complex. If the sum assured is payable to the other shareholders and they use it to buy his shares, what happens if he is able to come back to work? It needs to be thought through carefully with the IFA."
Adding value
Writing business protection policies in trust can be a very good opportunity for IFAs to add value to a sale, because it can potentially save their clients a substantial amount of time and money when they are dealing with the loss of a partner.
Macdonald says the new pensions regime is an ideal opportunity for IFAs to sell a greater number of products and write them in trust if necessary. He says: "Stakeholder is a good opportunity to sell everything else as well as pensions. Employers may also be able to get corporation tax relief, which, depending on the premium, can potentially be netted down by over 30%."
However, until the past few years very little insurance was actually written in trust. Smart says: "Only about 10% of our insurance applications are accompanied by a trust application. Although this has actually doubled in the past few years it is an area that requires more attention."
Although trusts are legal documents and can be quite complex, a lot of insurance providers now have their own trust forms which have been drafted by solicitors and specifically designed around their policies. Ian Frater, head of media relations at Norwich Union, says that insurers are willing to help IFAs to promote the benefits of writing in trust. He says: "Most insurers now have forms and guidance information on trusts designed to help IFAs, but I think any firm would say consult a solicitor if there is any confusion."
It should not be forgotten that trusts are legal documents, and because each client will have their own specific needs, which may require the drafting of a complicated trust, IFAs should not be afraid to get help from a solicitor who can draw up a specific trust. Smart says: "It is good practice that the benefits of a trust are fully explained. Companies have been sued in the past for not advising clients to do it, for being negligent by omission, and it is important for IFAs to recognise this. They should really advise clients to seek advice from a solicitor if they are not confident themselves."
"But if clients do go to a solicitor there is a chance for a professional connection to be made. Solicitors will shortly be regulated by the Financial Services Authority so may decide not to offer financial advice anymore. They will have to find IFAs, and so it makes sense to approach them now. Trusts can be an important tool in growing business," says Smart.
Writing insurance in trust can have advantages for both the client and the IFA. Clients can ensure that a claim will reach their intended beneficiaries quickly, and IFAs can add value to the sale and make valuable contacts. Paul Heaphy, protection marketing manager at ZIFA, says: "You could argue that all death cases should be written in trust. IFAs have to see the trustees when they are setting it up, so they are seeing the next generation of clients. When the money is paid out, then who is the first person they will call when they need advice?"
