Planning to put your life insurance in trust? Here’s what you need to know

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When it comes to your family ‘s financial future, it makes good sense to take all necessary steps to defend their standard of living. 

Life insurance is a protection service intended to pay out a great sum or potentially a regular revenue if you die during the term of the policy. 

It goes without saying that many people choose to put their Life Insurance into trust as it can stay outside their estate for tax purposes. That means they can avoid inheritance tax on the payment while their family gets access to the cash quicker as the pay-out will not need to go through probate.

Believe it or not, the inheritance tax is charged at 40% no matter the assets worth, more than an individual IHT allowance, thus it could quickly eat up a considerable chunk of your benefit.

Life insurance into a trust allows you to direct what your beneficiaries use the income for much easier. For instance, you might want to agree your children use the money in their education or can only access the income when they reach a specific age. 

What is a trust and how does it work?

A trust allows you to put aside an asset separately from the rest of your assets for the benefit of a specified person or a group of people. This asset is managed by a trustee or trustees until such time as the beneficiary is planned to benefit. So, for instance, your wife or husband may take charge of the property on behalf of your children until they reach a reliable age. 

Life insurance policies are considered a great asset and putting a policy into a trust can influence the pay-out in the event of your death. Thus, with your life cover put into a trust, the income goes exactly where it has to go, namely to your beneficiaries. Things begin to sort out differently when you know those you love will have sufficient cash at hand. 

  • When you apply for a Life Insurance trust policy, the pay-out is successfully ring-fenced, holding it separate from your estate. 
  • A Life Insurance in trust and outside the estate means your family or beneficiaries normally gain access to the money faster, mitigating any sort of financial burden. 
  • Life Insurance trust does not require any additional costs and paperwork. 

Bear in mind that if you do not write your life insurance in a trust, this can become a part of your estate when you die for inheritance tax purposes. In turn, your loved ones might not receive the whole benefit of the policy, meaning that they don’t have enough income to meet commitments such as the mortgage after your death. But how do Life Insurance Trust Work? A trust is unexpectedly simple and easy to initiate and normally will not cost you extra taxes. The procedure to set up a Life Insurance trust generates what is known as a trust deed, which determines under which terms and conditions the trust must operate.  

A trust involves the following entities: 

  • The settlor- the person who agrees on the trust and puts the life cover into it
  • The beneficiaries- that can be your spouse or a group of people who will get the income from the trust.
  • The trustee- those responsible for the trust and the policy on behalf of your family or other beneficiaries. 

Life Insurance Trusts Give You More Control

Before we delve deeper into the benefits of a Life Insurance trust, make sure you check the top life insurance companies list here to help you decide which company will suit your family’s needs. Choosing the right life insurance provider isn’t always easy. As you know, America is home to dozens of major life insurance companies, and many of them are pretty shady as they’ll take any excuse to decrease or deny your claim and leave those you love with nothing. 

One of the benefits of having your Life Insurance in trust is that it allows you to specify and plan the paid out. As we previously mentioned, trustees can be nominated to manage the income for the benefit of children under 18. Simply put, a trust will guarantee that the pay-out will go exactly where you intended to. 

You Can Avoid Inheritance Tax and Probate 

One of the biggest benefits you can get from a Life Insurance trust is that you can actually avoid paying inheritance tax because the value of the policy does not count as the value of your legal estate. Typically, when the settlor dies, the value of the real estate is calculated, and anything beyond is taxed as at 40%. 

If you have a standard life insurance policy, be sure that its whole value will be included in the calculation of the real estate. Nevertheless, if you choose to place your life insurance into trust, then the profits from it will be sent exactly when they are needed the most, namely to your beneficiaries and not your estate.   

It does not cost extra

Contrary to many inexperienced beliefs, setting a Life Insurance trust does not cost extra as your insurance provider should provide you with this option for free when establishing the policy. Moreover, it might be worth knowing that if you have current life policies, they can also be transferred into the trust. But in case you plan to transfer one of those policies into a trust, make sure you speak with your legal advisor. 

Before throwing yourself on the first policy offer that you want to write in trust, make sure you investigate each option you have available. Afterward, planning your family’s financial future isn’t as easy as you think, so it makes good sense to investigate thoroughly and wait for a better deal. This might help you get your life insurance in the right way and offer those you love the maximum possible of financial benefits.