Putting your life insurance in trust is a good way to protect your family from financial difficulties when death occurs. Life insurance policies are noteworthy assets, and putting them in trust can help you manage the way your beneficiaries receive their inheritance.
There are so many benefits attached to putting life insurance in trust. Trust allows you to pay less tax and offers a faster payout. Putting your life insurance in trust gives you control over who can benefit from the payout after you are gone. It also reduces the chance of tax bills on inheritance, and it speeds up how fast the money is paid out.
Policyholders may not want to take into consideration what may occur after they are gone, but it is a good idea to help the people you will be leaving behind are properly taken care of financially. After you are gone, your life insurance will pay out a huge sum of money to your beneficiaries. This write-up contains all the information you need to know about putting your insurance in trust.
What is a Trust?
A trust is an honest legal arrangement that allows you to leave assets to your relatives, friends, and any other person you select to be part of your beneficiaries. A trust is managed by one or more trustees, such as friends, family members, or legal professionals, up until it pays out to the beneficiaries.
This payout can only happen when the policyholder is no more and on special occasions, like when the child turns 18. You can put your life insurance in a trust, also referred to as writing life insurance in trust. However, while there are many benefits of trust, one of them is that your policy value will not be considered as part of your estate.
How Trust in Life Insurance Works
Putting your life insurance in a trust guarantees that after you die, your trustees will care for your policy and ensure payouts are made according to your beneficiaries. Beneficiaries may be your spouse, children, relatives, charity, or friends.
Your beneficiaries must be up to 18 to access the funds from your trust. Trusts aid flexibility, allowing policyholders to decide how payouts should be made even while still alive.
Types of Trust in Life Insurance?
There are different types of trusts you can put your life insurance in. Deciding which of the following types of trust is best for you is quite important to do.
• Discretionary trusts
Your trustees have a high chance of disposition on what beneficiary to pay when you are no more by making use of your letter of wishes. Your letter of wish states your intentions as to how you want your trustees to deliver the trust.
• Survivor’s discretionary trust
This is most useful for those who purchase joint life insurance, for example, couples. If one of the couples dies, the surviving partner will get the life insurance payout before other beneficiaries. If both policyholders die within 30 days of each other, the payout will go to other beneficiaries.
• Flexible trust
This is a type of trust where you have two types of beneficiaries. The first is the default beneficiary, while the second is the discretionary beneficiary.
The first beneficiaries are entitled to an income from the trust as it comes up. While the second beneficiaries only get income or capital from the trust if the trustees make engagements with them during this period.
• Absolute trust
In this type of trust, the beneficiaries are listed as people who cannot be replaced in the future. These beneficiaries include children born later on and spouses taking a divorce.
Immediately after you set up your trust, your trustees now legally own the insurance policy and keep the trust safe until it’s needed.
Benefits of Putting Life Insurance in Trust
As previously stated, there are many benefits to putting your policy in trust. Some of the benefits include the following:
• Control over assets
If your policy is not in trust, your money may be used to pay off unpaid debts. Putting your insurance policy in trust gives you better choices. This is because you get to decide who you want to be your beneficiaries and trustees. Creating trust is very important for those who are not married yet or are in a civil partnership.
• Faster payouts to your money
Beneficiaries of policyholders without trust may likely need to get probate, which may lead to delays. However, with a trust, your beneficiaries would receive the inheritance in place a few weeks after the death certificate has been obtained.
• Protection for beneficiaries from inheritance tax
Putting your life insurance in trust means the payout made from your policy would not be considered a part of your estate. However, there are a few exceptions, like being liable for an inheritance tax charge for your property value every ten years.
Disadvantages of Putting Life Insurance in Trust
Just as there are benefits to putting your life insurance in trust, there are also disadvantages to it. Some of these disadvantages include:
• Irrevocable decision
Immediately you put your policy in trust, it cannot be reversed. This means you cannot remove the policy, as your decision will be considered irreversible.
• Loss of some control
Once life insurance is in trust, any decision made must be signed off by your selected trustees, not you alone.
How Long Does a Trust in Life Insurance Last?
Generally, trust can last up to 125 years, meaning there is no expiry date for trust for charitable reasons, but unlimitedly, your trust agreement will last for as long as you consider necessary.
