Life insurance trusts and beneficiaries explained
What is the purpose of a life insurance trust?
A trust is an agreement where you ask another person(s) to manage your assets. These people(s) are “trustees” and own the asset, but you can be one of the trustees. The trustees then manage that money for the beneficiaries.
Placing your life insurance plan into a trust has many benefits, often the main one being that when the plan pays out the money goes to the people you have named within the trust, and it isn’t included in your taxable estate. This will usually have its own Inheritance Tax benefits.
There are a few reasons why you might create a trust:
- If you have outstanding debts, such as a mortgage, the payout would go straight to your trustees. They will then clear your mortgage or pay of an Inheritance Tax bill. So, your family don’t have to immediately sell the property.
- Or you could choose to use some of the money for funeral expenses.
- You might also want to make sure some of the money gets sent to a charity you support.
How are life insurance and life insurance trusts used in estate planning?
Once you have created the trust, you will then need to appoint trustees. Trustees are individuals who will manage the plan on your behalf. As a plan owner, you can also be a trustee.
The benefits of putting life insurance in trustYou can put your life insurance payout into a trust. This can be a good idea if you want the money to go to a child. The trustee manages the money until the beneficiary turns 18. Before then, the trustee can spend it on things like education and day to day living costs of the minor.
There are benefits to paying your life insurance into a trust:
- The money is not counted towards your taxable estate
- The beneficiary doesn’t pay inheritance tax on it
- The beneficiary may also receive the money faster. It does, of course, mean you have to trust the trustee to do what you want with the money.
What is a beneficiary?
If you have more than one beneficiary, you have to decide exactly how much each will receive. For example, if you have a spouse or civil partner and two children, you might give your spouse 50% and each of your children 25%.
Your beneficiaries can then use the money for anything they wish. Very often, life insurance policies pay out faster than the money from your estate. This means your beneficiaries could access the money quicker. The beneficiary can use their funds for anything they would like, such as day to day living expenses.
Without a trust, your will beneficiaries or next of kin can still receive their share of the proceeds, but it may take a little bit longer. This is because a Grant of Probate may be required and there may be some tax to pay.
Who can be a life insurance beneficiary?Beneficiary rules mean that anyone can be the named recipient. It is common to choose a marital partner or children. It can also be a boyfriend/girlfriend, grandchildren, friends or siblings. You could also choose organisations such as charities. You may wish to appoint specific beneficiaries by will or appoint them via a trust.
Deciding who your life insurance beneficiary will be is a big decision. Sometimes it’s obvious who you’ll choose, but other times it’s worth thinking about. Think about what receiving that money will mean for different people. Receiving a payout is usually a positive, but it can cause difficulties too. For example, it could cause a lot of conflict.
If the life insurance beneficiary is a minor, they can’t receive the money until they’re 18. You should think about what will happen at claim stage if the beneficiary is yet to reach the age of 18. Their parent or guardian could use it to help with daily living costs or education.
How to appoint a beneficiary to your life plan?
You can appoint a life insurance beneficiary at the time of or after placing your plan into a trust.
You have the option of choosing an absolute trust or a discretionary trust.
Absolute trusts are created in favour of specific beneficiaries. Their interests are fixed at the start and cannot change. If a beneficiary dies before the life assured, their estate will benefit when the entitlement arises.
Discretionary trusts are created in favour of a group of potential beneficiaries. The trustees can exercise their discretion to benefit anyone within the group. The trustees are guided by a non-binding letter of wishes, written by the plan owner.
If you do not wish to place your plan in trust, you can appoint a beneficiary to your plan in your will. Otherwise, the proceeds will be shared subject to the rules of intestacy.
Changing a beneficiary on a life insurance trust
You might decide you want to change the beneficiary of your life insurance. This might be because your relationship with them changed. Or maybe they inherited money from someone else and no longer need the money. It might be possible to change the beneficiary on your trust, but this depends on the type of trust you have chosen:
- If you have opted for an absolute trust, then your beneficiary choice is final. You cannot make any changes to an absolute beneficiary or their share.
- If you have opted for a discretionary trust, then you may amend your potential beneficiaries and their shares. You can do this by updating your letter of wishes. It is important to remember that the final decision lies with the trustees.
- If your plan is not in trust and you do not wish to use one, but you have appointed beneficiaries by will, you may want to update your will.
Do life insurance companies contact beneficiaries?
How is life insurance paid out to beneficiaries?
Life insurance claimants or trustees receive the payout in a single lump sum from the insurer. They first need to tell the insurance provider you have died and provide a death certificate. They’ll then need to complete a claim form and provide details of the trust, if applicable. The payment is often made to their bank account, or it may be sent to the executor of your will. If the money is being sent to a minor, it may be paid into a trust.Read the terms and conditions of your plan to make sure you understand the process. If you’re unsure, ask the provider.
Do you need a will for life insurance?
No, you don’t need a will for life insurance.
If your plan is not in trust, the funds will be paid to your next of kin or the executor of your will. They may be required to provide a Grant of Probate.
Life insurance and wills can get complicated. It is normally best to mention your life insurance plan in your will. Explain who the beneficiary is and what you would want them to do with the money. This will make things a lot clearer for your loved ones, and it can also reduce the risk of disputes.
Can a will override a life insurance trust?No, a will cannot change a life insurance trust. Your will says what you want to happen with your estate. That’s things like:
- Bank accounts
- Art collections
- And other belongings.
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