Do you need to set up a Trust when taking out a life assurance policy

dunstonh

My son just asked me who to add as a trustee for the trust they need to set up for their life assurance policy (advised by their mortgage advisor - I think to avoid inheritance tax)

That is unlikely to be for the mortgage life assurance as you don't normally put those in trust.  joint life, first death set up with joint owners would pay out to the surviving policy owner directly without the need for a trust.

Where you want spouse/partner to receive additional funds on death above the mortgage then joint life or life of another would be used.   However, with unmarried couples, trusts can also be used if joint owner plans are not being set up.

If they are concerned with the second death and the children avoiding inheritance tax, then you could use a trust.

'm a bit worried as everything I've read about trusts is don't touch them with a barge pole! 

I suspect you have either misread or misunderstood.    Any site saying you shouldn't use a trust for life assurance for family protection (not mortgage) is likely to be wrong.   Trusts can be used for many things.  Some trusts are completely pointless and almost reckless but they would not be used with life assurance.   So, it's important to make sure you are reading about the right trust for the right purpose.    Trusts are not just one thing.  You get good, bad and ugly.

One thing to be on guard with is that if the mortgage adviser is the estate agent adviser, then most of these operate with a salesforce mentality and sales pressure.    A small number of independent or boutique estate agents will use local independent mortgage brokers which are fine.  If your son has gone to an independent mortgage adviser not linked to the estate agent then you expect a step up in quality over the estate agent one.

Cressida100

Emmia said:

The intention of the policy is that the mortgage could be cleared with the payout in the event of the demise of either of them.

Policies may also payout (depending on the terms) in the event off the diagnosis of some, life limiting or employment limiting conditions.

If they can each afford the mortgage solo, then the policy may be redundant, but if either one of them can't, then that's what the policy will help with should the worst happen.

The trust element just takes it out of the estate so the survivor can get the money. As they're not married/CP there's no automatic transfer of assets from one person to the other in the event of the death of the first one, and there's a risk (if the estate is large enough) for IHT to be due at that point.

Do your son and his girlfriend have wills in place? I'm sorry if this seems morbid, but if they're not married their assets do not automatically go to the other.

Thanks for the response and explanation. Neither of them could afford the mortgage solo. No they don't have wills in place - I will mention that to them.

A couple of years ago I sorted my Will and powers of attorney so I know the process. It's the Will charity week 8-14 September so that would be a good time for them to get those sorted. I used a local solicitor to prepare mine and I can recommend him to them. Son will also need to think about whether he wants to change his 'expression of wishes' on his works pension. At the moment he has named me as the beneficiary. 

Cressida100

dunstonh said:

My son just asked me who to add as a trustee for the trust they need to set up for their life assurance policy (advised by their mortgage advisor - I think to avoid inheritance tax)

That is unlikely to be for the mortgage life assurance as you don't normally put those in trust.  joint life, first death set up with joint owners would pay out to the surviving policy owner directly without the need for a trust.

Where you want spouse/partner to receive additional funds on death above the mortgage then joint life or life of another would be used.   However, with unmarried couples, trusts can also be used if joint owner plans are not being set up.

If they are concerned with the second death and the children avoiding inheritance tax, then you could use a trust.

'm a bit worried as everything I've read about trusts is don't touch them with a barge pole! 

I suspect you have either misread or misunderstood.    Any site saying you shouldn't use a trust for life assurance for family protection (not mortgage) is likely to be wrong.   Trusts can be used for many things.  Some trusts are completely pointless and almost reckless but they would not be used with life assurance.   So, it's important to make sure you are reading about the right trust for the right purpose.    Trusts are not just one thing.  You get good, bad and ugly.

One thing to be on guard with is that if the mortgage adviser is the estate agent adviser, then most of these operate with a salesforce mentality and sales pressure.    A small number of independent or boutique estate agents will use local independent mortgage brokers which are fine.  If your son has gone to an independent mortgage adviser not linked to the estate agent then you expect a step up in quality over the estate agent one.

It was a knee-jerk reaction from me. I read these boards a lot and in a panic I just remembered the advice for people who set up trusts aiming to avoid care home fees. I have read a bit more online now.

The mortgage adviser is the wife of one of my son's work colleagues who he considers a friend (not connected with the estate agent in any way). They are very happy with her and I guess you just hope that due to a connection of sorts that she will be honest and transparent and work in their best interests. The EA did recommend a solicitor (whose prices were much higher than the one they went with). 

Times change, when I needed a mortgage many years ago I sourced it myself and was heavily involved in the details. Mortgage advisers weren't so popular in those days. I am used to doing the leg work . I now know that mortgage advisers can sometimes source better deals. 

MyRealNameToo

Brie said:

cynical me thinks that the advisor is looking to line his/her pockets as much as possible by adding on lots of extras that give them commission.  I've never heard of a trust needed to set up a life assurance policy.  And a life assurance isn't needed (as far as I'm aware) to get a mortgage.  Might be a good idea but I don't think the mortgage companies can insist on it anymore.  

Wrong way round @Brie, there is no commission for putting a life policy into trust but it takes time and effort for the advisor to do so. 

A trust isnt "needed" but is highly advisable given it moves the insurance payout to be outside of the estate so exempt from IHT and enables it to be paid out straight away rather than being subject to probate. 

But if you want to avoid a trust for some odd reason, to give HMRC 40% of the insurance and have to wait 9 months to receive the remaining 60% then go ahead and dont use a trust for life insurance. The fact it's not advisable to put your main home into a trust doesnt mean it's not advisable to write your life insurance into trust. 

Brie

@MyRealNameToo
thanks for that - never was a thing when we first bought and got life assurance.

MyRealNameToo

Brie said:

MyRealNameToo
thanks for that - never was a thing when we first bought and got life assurance.

Dont know when you bought your first life insurance, have seen insurance in trust from the 80s but its one of the few areas of insurance that I've had little practical exposure to and know it more from a conceptual risk management perspective. 

poseidon1

MyRealNameToo said:

Brie said:

MyRealNameToo
thanks for that - never was a thing when we first bought and got life assurance.

Dont know when you bought your first life insurance, have seen insurance in trust from the 80s but its one of the few areas of insurance that I've had little practical exposure to and know it more from a conceptual risk management perspective. 

Also depends what circles you moved in and the knowledge base of the advisers concerned

In the accountancy profession, I was aware of Married Women's Property Act (1882 )  policies in trust as far back as the 1970s - see below -

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm20181#:~:text=IHTM20000-,IHTM20181 - Life Policies: Married Women's Property Act policies: introduction,[1926] I Ch 48.

As above, life policies held in trust therefore are nothing new.