There are a whole host of potential benefits to writing your life insurance policy in trust, yet at present only 6 per cent of people do so. When planning for your family’s financial future you should take every step available to protect their standard of living. By taking a few simple steps and arranging your life insurance in the right way, although it is not applicable in every case, writing life insurance in trust can benefit your family in a number of ways.
What do we mean by a trust?
A trust agreement allows you to set aside a single or number of assets for the benefit of a specified individual or a number of people. Trustees are specified who manage the assets until such a time when the trust dictates control of the asset is to pass to the intended beneficiary. Life insurance is such an asset which can be written into a trust, with positive consequences for the beneficiary.
Inheritance tax
One of the main advantages of writing life insurance in trust is to reduce the amount of tax which is deducted when the policy pays out. The payout from a life insurance policy will form part of a legal estate, and as a result, may be subject to inheritance tax. Currently in Ireland inheritance tax is 33 per cent, which is payable on cash; jewellery or a car; a transfer of a house or lands; a transfer of stocks and shares or the use of a house for a life.
Taking the decision to write your life insurance policy in trust ensures that rather than being paid to your legal estate, the proceeds of the policy will be paid directly to the beneficiaries and will not be taken into account when inheritance tax is calculated.
Gain greater policy control
By writing your life insurance in trust you will increase your level of control over the policy and the way the proceeds are administered. One example is appointing a trustee, who will oversee the money designated for children until they are 18.
Creating a trust can also help to ensure the proceeds of the policy end up with your intended beneficiaries rather than in the hands of creditors if you owe money at the time of death.
Are there any drawbacks?
It is advisable that life policies held with the sole intention of paying off a mortgage should not be written in trust. There are no additional costs associated with writing Life Insurance in Trust, as most insurers offer this as an option when the policy is taken out. And in some cases existing policies can be transferred into trust, however once a policy is set up in Trust, it is absolute and cannot be changed.