Trusts product guide

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What is a trust?
In broad terms, a trust is simply a way of gifting property. Any type of property – shares, buildings, cash, etc. can be placed under a trust. So why use a trust for your life assurance policy?
A life policy is designed to provide a lump sum in the event of your death. A flexible trust holds the death benefit for your chosen beneficiaries if you die within the policy term.

You choose the people who can enjoy the gifted property after the death (the beneficiaries). However
the trust allows you to add or remove beneficiaries, accommodating changes to your personal circumstances.

A flexible trust will identify the beneficiaries and the trust property (the lump sum death benefits), and will set out the rules on how the trustees (the people who administer the trust) can deal with that property. The trust places the legal ownership of the trust property in the hands of yourself and your co-trustees.

Who is the settlor of a trust?
The person(s) making the trust.

Who may be a trustee?
Any individual except minors and those of unsound mind may act as a trustee. It is advisable to have trustees who are resident in the UK to ensure there are no foreign tax implications. Also from a practical viewpoint it makes sense to have trustees who are easy to contact and likely to keep in touch.
When you place a policy in trust, you are automatically appointed as a trustee. A beneficiary can also act as a trustee.

Companies can be trustees. Most of the high street banks have related trust companies for the specific purpose of administering trust funds. As the corporate trustee effectively has perpetual existence, this overcomes the problem of individual trustees dying, wishing to retire or simply disappearing! Corporate trustees will, however, charge for their services and may not know your personal circumstances when you die.

What are the role and duties as trustee(s)?
Your trustees may do little more than sign the trust form at outset. The trustees will usually only have a job to do if you die within the policy term. In these circumstances, they will receive the death benefit to pass on to the beneficiary or beneficiaries.

However, payment of the death benefit to the trustees does not necessarily mean the end of the trust. The trustees may not be able to pay the policy proceeds to the beneficiaries straight away. If the beneficiaries are minors, the trustees may need to reinvest the cash. At that stage the trusteeship
may become more demanding, although trustees are not expected to have any specialist knowledge other than which they may already possess.

We will require the written authority of all trustees before paying out the death benefit. Trustees will need to act together in exercising their powers under the trust. Please note: We can only act on the instructions of the trustees (the legal owners) not those of a beneficiary.

How many trustees are normally appointed?
Normally at least two trustees are appointed at outset. For ease of administration the number of trustees is usually limited to three or four. Too many trustees can be more of a hindrance than a help.
Please be aware that if you are the only trustee and you die, one of the advantages of the trust will be lost, namely speed of payment of the death benefit. In this situation, it is likely that your legal personal representatives will become responsible for administering the trust and they will only be able to assume this duty after probate, letters of administration or confirmation have been granted.

Can trustees be changed?
Yes, new trustees can be appointed, and retiring trustees can be removed at any time. If at any time, you are the only remaining trustee, we recommend you appoint a new trustee to act with you.

Who can be a beneficiary?
You can name any individual or charity as a beneficiary of your trust. Make sure that anyone you may wish to benefit is included in the list of potential beneficiaries. You can add their name to the list, if they are not already included.

Can beneficiaries be changed?
Yes. The trust wording is “flexible” so you can change your named beneficiaries at any time.

What are the main advantages of writing a life policy into trust?
There are several advantages in writing a life assurance policy under trust. These can be summarised
as follows:

• Prompt payment of the policy proceeds without awaiting probate.
• Inheritance tax (IHT) benefits.
• Flexibility and a degree of control.
• Avoidance of probate

It is obviously an advantage to have the policy proceeds paid out promptly on death. By using a trust, payment of the policy proceeds to your surviving trustees can be made on production of a death certificate, without waiting for your personal representatives to produce a grant of probate or letters of administration. It is therefore important to ensure that you do not remain the only trustee.

Inheritance Tax (IHT)
If you have life assurance the benefit will be included in the calculation of IHT. Using a trust means the death benefit will not generally be included in your estate for IHT purpose.

Flexibility and degree of control
Use of a suitably flexible trust provides a versatile personal and financial planning vehicle. Any death benefit is paid to trustees you have chosen who get to decide who eventually receives the policy proceeds.

PLEASE NOTE: Law and HM Revenue & Customs practise may change at any time.
This leaflet is based on our understanding of both at April 2008.

Contact one of our advisors for assistance with trusts.

The Financial Services Authority does not regulate taxation and trust advice