The Importance of Trusts:
Ensuring Financial Security for Your Loved Ones
When it comes to life insurance and protection policies, setting up a trust is one of the smartest ways to ensure that the payout goes to your intended beneficiaries in a tax-efficient manner. But understanding the intricacies of gifted and retained benefits and how to place your policy in a trust can be complex.
At Bright Life Protection, we guide you through these crucial decisions to help protect your family’s financial future, ensuring that the benefits from your policy are distributed according to your wishes while potentially reducing your tax liabilities.
What Are Gifted and Retained Benefits?
In the context of life insurance and protection policies, the terms gifted and retained benefits are often used when dealing with discretionary trusts. Here’s how they work:
- Gifted Benefit: This refers to the proceeds of the policy being paid out to the beneficiaries, meaning the settlor (person setting up the trust) cannot benefit. Life insurance policies typically fall into this category because the settlor must pass away for the policy to pay out.
- Retained Benefit: This occurs when the settlor can benefit from the policy while they are still alive, as is the case with critical illness or total permanent disability policies.
For example, if Donna, a client of Bright Life Protection, has a standard life assurance policy, it would be considered a gifted benefit since Donna wouldn’t benefit directly from it herself.
However, if her policy also includes critical illness cover, some providers might treat the critical illness benefit as a retained benefit because she would need the funds to manage her illness while alive.
Why Place Your Life Insurance in Trust?
Placing your life insurance policy in a trust has multiple advantages, particularly when it comes to inheritance tax (IHT) and ensuring the right people receive the payout. When a policy is placed in trust, the proceeds are kept outside of the settlor’s estate, which means they can be passed on to beneficiaries free from IHT. This ensures your loved ones receive the full benefit without being impacted by taxes on your estate.
Key Benefits of Placing Your Life Insurance in Trust:
- Avoiding Probate Delays: If the policy is in trust, the payout goes directly to your beneficiaries without having to go through the often lengthy probate process.
- Inheritance Tax Efficiency: As the proceeds are held outside of your estate, they are typically not subject to IHT, helping you pass on more to your loved ones.
- Control and Flexibility: Using a discretionary trust allows you to provide your trustees with the flexibility to decide how and when the proceeds are distributed, which can be especially beneficial if your beneficiaries are young or financially inexperienced.
When to Use a Split Trust
In cases where both retained and gifted benefits are needed, such as when a life insurance policy includes critical illness cover, a split trust can be a valuable solution. Split trusts allow the policyholder to access critical illness benefits during their lifetime while ensuring that life cover proceeds are passed to the beneficiaries upon death.
For instance, Cathy, a Bright Life Protection client, arranges a life and critical illness policy. By placing the policy in a split trust, Cathy can receive a payout if she is diagnosed with a critical illness, but if she passes away, the remaining benefit will be transferred to her beneficiaries—her husband Larry and daughter Haley—without it being included in her estate for IHT purposes.
Choosing the Right Trust for Your Policy
Selecting the most appropriate trust structure depends on your unique circumstances and financial goals. At Bright Life Protection, we help you navigate the process, ensuring you choose the right trust to provide your loved ones with the financial protection they need, while maximizing tax efficiency.
If you’re ever unsure which trust is right for your situation, our expert advisers are here to help guide you.
By combining the benefits of setting up a trust with your life insurance policy, you ensure financial security for your family while potentially reducing tax liabilities. To explore how to place your policy into a trust, get in touch with one of our specialists at Bright Life Protection today.