How a trust can help your financial planning

Writing a policy in Trust could be perceived as something that only the wealthy require, but the reality is Trusts can play an important part in financial planning for people from all walks of life.

When it comes to planning your family’s financial future it makes sense to take all steps possible to help protect their current, and future, standard of living. As part of this, it’s important to make sure any policies you have in place will pay out to those they are intended to benefit, and this could mean writing the policy in trust. 

Put simply, a trust is a legal arrangement that assets such as cash, investments and property can be transferred into, and a trustee or trustees appointed to look after on the policyholder’s behalf. Trusts are usually straightforward to set up but it’s important to select the right type of Trust and complete the documentation carefully. 

The three most common types of Trust are: 

Bare Trusts

Typically set up to pass assets to young people. When the beneficiary turns 18 (16 in Scotland), they can use the capital and income held in the trust in any way they choose. Bare Trusts are treated as Potentially Exempt Transfers (PETs) which means inheritance tax would be payable if the trust settlor dies within seven years of setting up the trust. 

Discretionary Trust

Here, trustees can make certain decisions about how the beneficiary uses the assets held in the trust. For instance, what gets paid out and to whom and how often payments are made. They can also impose certain conditions if, perhaps, they deem the beneficiary is not responsible or capable of dealing with the money themselves. 

Interest in possession (IIP) Trust

Under this type of trust, a beneficiary is entitled to the income generated by the trust as it arises, which will be subject to income tax. They are unlikely to have any rights to the capital, which will pass to another beneficiary in the future. A common use of an IIP trust is for it to form part of the will of someone who remarries after divorce and wants their children from their first marriage to continue to receive financial support.

Despite the positive impact setting up a policy in trust can have on your financial planning, only 6% of life insurance policies in the UK are set up in trust, according to insurer Aegon.

If you’re thinking of putting a life policy in trust, please talk to us first. We can tell you which type of trust is most appropriate for your circumstances and help you put the trust in place. 

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate Trust Advice.