A life assurance policy will often form an essential part of estate planning, where policy proceeds can be used to provide the necessary funds to see your loved ones through the estate administration process, until other money and assets can be released. It may also be sufficient to set them up financially for their future or, at the very least, maintain or improve their standard of living.

That said, where a life assurance policy has not been written into a trust prior to death, this will automatically be treated as part of your legal estate after you die. This means that the policy proceeds will not usually be made available until a grant of probate has been obtained, causing unnecessary delay in gaining access to these funds.

It also means that where the value of your estate exceeds the relevant threshold, the policy will be subject to inheritance tax in the same way as any other estate asset.

What estate planning steps should I take to protect my policy?

By using a trust mechanism for your life assurance policy, this will help to avoid going over the inheritance tax threshold and will allow your loved ones to bypass probate, at least in respect of this particular asset. Probate is the legal process of granting your personal representatives the authority to deal with your possessions. 

A trust essentially allows you to set aside an asset, in this case the proceeds of your policy, to benefit a specified person or people. These are known as the beneficiaries. By putting a policy into a trust you can control what happens to the payout from a policy in the event of your death, in some cases providing an immediate tax-free lump sum for your beneficiaries, depending on the type of trust used.

What types of trust can be used to protect my policy?

An absolute trust is ideal for where you would like to name a specific beneficiary or beneficiaries, such as your spouse and/or any children. This type of trust will give each named beneficiary an absolute entitlement to a fixed share of the proceeds on the death of the policyholder, in this way ensuring that the trust fund is paid directly to your loved ones rather than to your legal estate. This means that the money can be released without the grant of probate and will not usually be taken into account for inheritance tax purposes.

In other cases, especially where your children are under 18, you may prefer the flexibility of a discretionary trust. This will again allow you to name a number of beneficiaries, although none of them will have an absolute entitlement. Under a discretionary trust your trustees have a high level of discretion about which beneficiaries to pay and when, although you can provide them with a letter of wishes outlining your intentions as to how the trust should be administered.

The discretionary trust can be useful in the case of parents or grandparents who wish to benefit future generations, depending on the stage that each potential beneficiary has reached in their life when the policyholder passes away.

What advice should I seek when protecting my policy?

If you are considering putting a life assurance policy into trust, you must always seek advice from an independent legal advisor, as the practical aspects and advantages will vary depending on the type of policy and your situation.

It is also worth noting that in some cases there may be tax implications when putting a policy into trust, especially when using a discretionary trust mechanism, so it’s important to secure expert advice tailored to your particular circumstances.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.