21st October 2022

Life assurance policies and investments written in trust – what happens next?

Many people will only come across trusts when they are being discussed in the same breath as life insurance policies, whether those are true protection products or investments structured as a life assurance policy, in the context of the investment/life assurance being ‘written in trust’.

These days it’s very simple for such financial products to be written into trust almost without understanding all of the implications of it being in trust.

So, first of all, why write in trust at all?

There are two reasons why – firstly, so that one is able to decide where the investment or the life policy proceeds go, which may differ from your wishes as far as the rest of your estate is concerned.

The second reason is that any investment or life assurance policy written in trust is usually outside the grasp of inheritance tax on your death. This may be particularly important if, having considered the rest of your likely estate on death, you are close to the limit of what can be left without any inheritance tax being due. For example, if a single or a divorced person, your asset level is at a single Nil Rate Band Allowance together with any applicable Residential Nil Rate Band Allowance. In the case of a widow/widower having had all of their deceased spouses’ assets coming to them, or of a married couple looking ahead to the IHT position as at date of death of the survivor out of the pair of them, then a double Nil Rate Band Allowance, together with a double Residential Nil Rate Band Allowance if applicable.

Leaving assets that otherwise stoke the IHT bill for those inheriting in trust where the same is easy to achieve and does not have any day-to-day impact upon your own standard of living is an easy IHT planning win at no cost to you.

If it is a true protection policy, then ordinarily until the date of death, the trust will have no value in it and as such at this point in time it remains outside of the scope of the recently revamped Trust Registration Service rules from HMRC. If it is, however, an investment structured as a life insurance policy, then it probably will require registration through the TRS portal. If so, you should check that this has been done by now – either through registration on the TRS system, or if the investment was put in place many years ago, through the submission of a form 41G.

This article, however, deals with other issues. The first is do you need a bespoke or generic deed putting the policy into trust? In the vast majority of cases, a free-at-point-of-provision trust provided by the life insurance provider or investment provider will be good enough and having a bespoke deed from a solicitor etc. will not be required.

Trustees need to be aware that unlike executorship, trusteeship is something they can easily retire from in the future, which is just as well, as otherwise they would be faced with the prospect of a role that only leaves them on death.

Generally speaking, it is a good idea to have at least two trustees in position at all times; there are specific rules regarding the numbers of trustees required if the trust holds land as a trust asset or the trust has underage beneficiaries.

It’s usually said that a trustee retires by signing a legal document to that effect which frequently will appoint one or more trustees as replacements to that retiring trustee. Of course, such a legal document cannot be signed where a trustee has died but a death certificate together with a deed from the surviving trustee appointing a replacement trustee or trustees for the deceased trustee should be enough.

It is always worthwhile checking through your financial advisor as to whether these deeds may come ‘free of charge’ from the life insurance provider/investment provider or not. If the answer is that they will not, then a solicitor drafted deed of retirement and appointment can be produced at a cost to the trust.

Such a deed will always be capable of doing the job of retiring and appointing trustees; that having been said, if the investment provider/life insurance provider will provide one free of charge, then it does make sense to use such a ‘free resource’.

It does always make sense to deal with retirement and appointment of trustees as soon as there becomes a hint of a problem. If nothing is done about it, then it can be somewhat difficult downstream particularly if one has fallen out with one’s trustees years back.

But what happens if there is a situation where you become aware that a trustee has lost mental capacity?

The first thing to say is that any Enduring Power-of-Attorney (‘EPA’) or registered lasting power-of-attorney (‘LPA’) will NOT assist because there is a blanket ban on such documents having efficacy over trusteeships. So, it’s always a good idea, if you know that a trustee is beginning to have difficulties i.e., has had a minor stroke or has a dementia prognosis but still has mental capacity, for them and their co-trustees to deal with the issue at that point in time when a deed of retirement an appointment trustees may still legitimately be signed.

But what if that point has been and gone in the past?

Section 36 of the Trustees Act 1925 provides a degree of let out (in some cases). There, provided that the trust is a discretionary trust and not what formerly would have been termed an interest in possession trust with the trustee having an interest, then the surviving trustees may by deed remove the incapacitated trustee and appoint another or others in place of the incapacitated trustee’s place.

Why does any of this have any relevance to me as the settlor of the investment or the life assured of the policy? I’ll be dead then when this all comes about…

The answer is that as and when there is something to be done, such as distribution of life assurance monies on the death of the person who set up the trust or upon maturity of the investment, none of these actions can be taken unless there is a competent group of trustees to sign encashment forms etc.

Now it’s frequently the case that such monies may represent if not the largest single investment that the settlor may have had during their lifetime, it may well be the second largest after consideration of a person’s home. Therefore it does make a great deal of sense to ensure that your trust arrangements remain up-to-date and capable of handling the funds as and when they come through.

The first point of call is always through your financial advisor or, directly through the investment provider/life insurance provider; it’s only when that comes up short i.e., that they are unable to assist, that recourse should then be had to solicitors to assist.

Whilst not mentioned previously it now, it is worth noting that there are other assets which are frequently written into trust for which the comments made above equally apply.

 

Those include death in service benefits (if those artel on offer as part of your renumeration package at work) and/or the death benefit of any money purchase pension plan.  For bespoke advice in this area, please contact our Edward Walter on ewalter@bussmurton.co.uk or telephone number 01892 502 320.

 

Edward Walter

Edward Walter
Partner