Trusts

Trusts

What is a trust?
A trust is a legal arrangement.  It allows the owner of property (the settlor) to transfer legal, and/or beneficial, ownership of that property
to other persons or a company (the trustees).  The person or company receiving the property holds onto it for the benefit of third parties
(the beneficiaries).  These roles are explained in more detail below.

The key people involved in a trust
There are three roles in any trust. These are:
• the settlor;
• the trustees; and
• the beneficiary.
This section explains what these roles are, their responsibilities and their rights.

Settlor
The settlor is the person who sets up the trust and transfers assets to it.  

Trustees
The trustees become the legal, and/or beneficial, owners of the trust property. They must administer the trust in accordance with the terms of the trust document and the law that governs the trust, manage the trust’s assets and distribute these (or an income from these) to the beneficiaries when appropriate.
It is important to choose the right trustees. They need to have good financial knowledge and be someone the settlor can trust. This could be a friend, a family member or a professional adviser. A professional trustee will usually charge for their services. It may not be a good idea to ask a beneficiary to become a trustee as this could lead to a conflict of interest. A trustee should be mentally capable and have a sound financial history. Under the law of England and Wales, a trustee must be over the age of 18. 

Beneficiaries
The beneficiaries are the people the settlor wants to receive the benefits from the trust. They can have different types of entitlement,
depending on the terms of the trust deed. The beneficiaries will not usually receive anything from a trust holding a life insurance policy until the settlor dies and a payment is made to the trustees. The trustees then look after the money, investing it if necessary, and distribute it amongst the beneficiaries in accordance with the terms of the trust. A beneficiary can be any age and could be an unborn child, such as a future grandchild of the settlor.

Why use a trust?
The reasons for putting a life insurance policy into a trust include:

1 The settlor can direct who benefits and how.
When a trust is set up, the settlor lists all the people they want to be able to share in the benefits payable under the life insurance policy
that is subject to the trust.  The settlor can even indicate what proportion of the money they would like each individual to receive - for
example John 25%, Jane 25% and Mark 50%.  Without a trust, the benefits payable under the policy would be payable to the settlor’s estate and he/she would need to leave directions under the terms of his/her Will to ensure the benefits pass to the people and in the manner intended.

2 Beneficiaries can receive policy benefits more quickly.
If a life insurance policy is written in trust, it is no longer part of the settlor’s estate.  So if they die, the trustees claim on the policy and the death benefits are paid directly to the trustees.  If a life insurance policy is not written in trust, the benefits payable on death are payable to the settlor’s estate if they die during the policy term.  This means a grant of probate, or letters of administration if the deceased had no Will, would be needed before the insurance company could pay out any money to the deceased’s personal representatives.  This can take several months.

3 Asset protection.
If a life insurance policy is written in trust, the benefits payable under it may be protected from third party creditors or anyone with a
claim on the settlor’s estate.

4 It can mitigate Inheritance Tax.
If covers under a life insurance policy are written in trust, the value of the benefits payable under them are not included in the settlor’s
estate for Inheritance Tax purposes when the settlor dies (as long as neither the settlor nor his estate or personal representatives are a
beneficiary).  There is therefore no Inheritance Tax to pay when the settlor dies in relation to any benefits held in the trust.  However, if the money is kept in the trust past its tenth anniversary, some Inheritance Tax may be payable and a charge could arise when money leaves the trust.

Please note: Any benefits that are retained by the settlor and not gifted into trust may form part of the settlor’s estate for Inheritance Tax
purposes (whether or not that benefit has been claimed).
Before considering a trust, we recommend that you speak to a professional tax adviser who can look at your specific circumstances and
explain how Inheritance Tax might affect you as well as any other tax considerations in putting a life insurance policy into trust.
 
Guide to being a trustee
The duties and powers of a trustee are set out in trust law, as well as in the trust document.  Below is a guide to the main trust law duties and powers, but it is also important to read the trust document to make sure you understand the responsibilities that you are taking on.  In fulfilling their role, a trustee is also expected to exercise such care and skill as is reasonable in the circumstances and manage the trust assets prudently as if they were the trustee’s own assets.  If a trustee fails to comply with the terms of the trust or their duties as trustee, they will be personally liable to make good the financial loss suffered by the trust fund.  The liability of a trustee for breach of the trust shall be limited to breaches arising from the trustee’s own fraud, wilful misconduct or gross negligence, except in the case of a trustee acting in a professional capacity.  The trustees shall not be liable for the default of a person acting under a delegated power, provided they took reasonable care in the selection and supervision of such person.

These products are not regulated by the Financial Conduct Authority.
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