Trusts, how do they work? Most people know of trusts but not how they can benefit by one. On your death, instead of paying the sum assured from your life policy direct to your estate, the payment goes into trust. This means that the proceeds should not be liable for inheritance tax. Additionally, it is possible to release funds to your family a lot quicker because they are not subject to probate.
In the event of death, the trustee(s), trusted by the settlor to ensure that funds go to the beneficiaries specified, receive the pay-out. The settlor is normally the owner of the policy and invariably the life assured. The trustee(s) are persons picked by the settlor to ensure that they deal with the trust correctly. The beneficiaries are those who will benefit from the trust.
There are many different variations of trust and its correct choice is important. Choose the wrong trust and you could end up with monies going to the taxman. Looking at the main types:
Absolute Vs Flexible
Simply put, a trust can be absolute or flexible. Their names sum them up pretty well. In the case of an absolute, (or bare), trust, once it is in place it cannot be changed. It is an absolute agreement which is set in stone. On the other hand, a flexible, (or discretionary), trust is just that, flexible. The details can be changed at any time, as long as there is an agreement between the settlor and all trustees listed in the trust.
Gift or Split Trusts
The purpose of any life insurance policy is often to provide a ‘gift’ from you to your family after you have died. You may also have critical illness cover with some policies. In the event of you suffering a critical illness, you may need the money rather than gifting it into trust. In this case, you would split the trust to retain any proceeds from a critical illness claim. At the same time, you would gift any life pay-out. Some policies will also pay out in the event of a terminal illness. Some clients prefer this is gifted to the trust while some prefer to retain the monies. This will allow for distribution of monies prior to death, (but there can be tax consequences).
There are many types of business trust, from shareholder and partnership protection to key person to relevant life.
Shareholder protection will usually pay-out the sum assured to the surviving shareholders. This will allow them to buy out the deceased shareholding from the family. This can provide continuity of the company. This will also ensure that the family of the deceased shareholder receives a pre-agreed amount for their shares.
Partnership protection will usually pay-out the sum assured to the surviving partner(s). This will allow them to buy out the deceased partner’s interest in the business from their family. Again, this can provide continuity of the business. It will also ensure the family of the deceased partner receives a pre-agreed amount for their share of the business.
Key person protection
Key person protection will provide a pay-out to the company in the event of the death of an employee or shareholder who is integral to the company. The monies received by the company are used, often, to help replace that member of staff.
Relevant Life Protection
The settlor is a company, normally the employer of the life assured for a relevant life trust. The life assured is usually a director/shareholder but can be an employee. With Relevant Life policies, the life assured chooses additional trustees and also chooses who he/she wants as beneficiaries. This can be the life assured’s spouse and children. In this way, your family will benefit in the event of your death. There are also substantial tax benefits for arranging life cover under Relevant Life policies.
There are many more variations to trusts than those listed above and other benefits for arranging business and Relevant Life policies. At Be Financially Secure, we can make sure that you have the right level of advice. We are totally independent protection specialists and offer independent advice.
The Financial Conduct Authority does not regulate Inheritance Tax Planning advice.
Life Cover (non-investment) and income protection. The plan will have no cash value at any time, and will cease at the end of the term. If you do not maintain premiums, then cover will lapse.
To safeguard your family’s financial security call Be Financially Secure on 01273 495446 or click here
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