The Role of Trustees
This bulletin explains why life assurance policies should be written under trust and describes what is involved in being a trustee of a simple protection life assurance policy under trust.
Facts and analysis
If a protection policy is not written under trust the following problems can potentially arise:
- As the policy forms part of the deceased’s estate, the proceeds cannot be paid until the executors have obtained probate or letters of administration. This can take a long time and cause an unnecessary delay before the beneficiaries receive the proceeds of the policy.
- If the policyholder has not made a Will, his estate including the proceeds of the policy will be distributed according to the rules of intestacy. These may well not coincide with the policyholder’s intentions and may lead to the policy proceeds being passed to people other than those the policyholder intended.
- On death, the proceeds of the policy will form part of the policyholder’s estate and consequently may be liable to inheritance tax.
By effecting the policy subject to a suitable trust the policyholder will ensure the proceeds are available quickly and usually free from any liability to inheritance tax.
The purpose of any protection policy is to provide financial security on the death of the policyholder for his/her chosen beneficiaries. A trust is a means by which the proceeds of the policy can be passed to chosen beneficiaries in a speedy and tax efficient way. When the trust is created, trustees are appointed to hold the policy subject to the terms of the trust on behalf of the beneficiaries. The parties involved when a protection policy is issued under trust are as follows:
Is the name given to the policyholder creating the trust and is the person who normally pays the premiums under the policy.
The trustees are the legal owners of the policy who exercise control over it for the trust beneficiaries. When the trust is created the settlor automatically becomes a trustee and names additional trustees to help administer the policy.
The beneficiaries are the people chosen by the settlor when the trust is created who will, or may possibly, benefit from the policy.
- During the settlor’s lifetime Whilst alive, the settlor is a trustee and will advise the additional trustees as to his wishes in respect of the policy. The additional trustees must consider any changes suggested by the settlor and acknowledge them. With a discretionary trust the trustees will have the flexibility to change the beneficiary who is to receive the policy proceeds. For this reason the additional trustees must regularly consult with the settlor to confirm his intentions as to who should benefit on his death from the policy proceeds.
- When the settlor dies When the settlor dies, the surviving trustees will be responsible for claiming the policy proceeds. With simple fixed trusts the wording of the trust will direct payment to particular beneficiaries in specified proportions. In these circumstances, the administration is fairly simple as the trustees cannot exercise any discretion. In the case of a discretionary trust, the surviving trustees will need to consider whether the settlor would still have wished the named default beneficiaries to receive the policy proceeds. In any case the trustees will have to exercise their discretion and appoint benefits to the default beneficiaries or one or more of the potential beneficiaries named in the trust.
Who can be a trustee?
Anyone over the age of 18 and of sound mind can act as a trustee, even if they are also a beneficiary under the trust. Normally at least one additional trustee should be appointed by the settlor to ensure the policy can be quickly dealt with when it becomes a death claim.
Role of the trustees
If there is no immediate need to pay the policy proceeds to the beneficiaries a discretionary trust will allow the trustees to invest the policy proceeds on behalf of the beneficiaries. If the trustees decide to continue the trust, they must ensure that:
- they invest in a proper manner
- investments are managed in accordance with the trust
- appropriate records are kept
- tax returns are made
In these circumstance the surviving trustees may decide to employ a professional trustee such as a solicitor to administer the trust.
Writing protection policies in trust is often necessary to achieve the policy proceeds being paid quickly to the right beneficiaries. Further, explaining the role of trustee to the additional trustees appointed by the settlor can be a valuable source of warm leads for generating future new business.
This information has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2021. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice