Writing a life insurance policy in trust can be of enormous value to the beneficiaries of the insured. It is a simple but essential piece of paper, says Lifesearch head of protection strategy Kevin Carr, which ensures the right money goes to the right people at the right time.
But Bright Grey technical product manager Ian Smart says the proportion of life insurance policyholders who write their policy in trust is shockingly low. He says only about 5 per cent of Bright Grey’s policyholders choose the trust route and estimates that take-up across the board is at no more than 10 per cent.
Smart says: “It should be a lot higher. We should be aiming for 90 or 95 per cent.”
Without a trust, intended beneficiaries of a policy payout are unlikely to avoid inheritance tax, potentially reducing the sum payable by 40 per cent.
Prudential head of UK business development Richard Leeson says: “If your policy is written in trust, then it will be kept outside your estate and you will not have to pay those taxes.”
Carr points out that it takes HM Revenue & Customs an average of six months to assess whether someone is liable for inheritance tax. If a person’s estate includes assets that are difficult to value, such as jewellery, the whole tax calculation process can be further delayed.
By writing a life policy in trust, any benefits are automatically excluded from this calculation and benefits can be paid immediately.
Carr says: “The minute a beneficiary’s name is written on a trust form, their payment is treated separately.”
Why is the use of trusts so uncommon? In some circumstances, Smart admits that a trust may not be essential for a client’s needs, Married couples and civil partners do not have to pay inheritance tax on assets passed between them on death, for example.
Smart says: “You could argue that a married couple with no dependents who own real estate valued under the £300,000 IHT threshold might not strictly benefit.”
Carr says apathy and lack of knowledge are also a major factor. “Customers are not excited about life insurance in the first place, let alone the tax implications, and so will not ask about it,” he says.
Alexander Price director Mark Keniston believes it is the responsibility of the adviser to inform clients about the benefits of trusts. He says: “It is for them to educate, whether through general advice, the information flow or a newsletter. It should just be part of the advice process.”
Carr says a general malaise in the adviser community is to blame. “IFAs in wealth management focus on savings, investments and pensions and see protection very much as a lower priority,” he says.
Smart, too, is bemused about why trusts are not encouraged on a more regular basis. He says one attitude is that the added administration represents unnecessary rigmorale. “A lot of IFAs are reluctant about another piece of paper in addition to other compliance steps,” he says.
Another problem is that advisers may not get any payment for persuading a customer to complete a trust form. Smart says this means they may see no direct incentive in recommending a trust.
But he says this is a short-sighted approach, as an adviser can actually use a trust to increase client business. “Trusts often allow IFAs to speak to the client’s trustees, who then may decide to use the adviser for their own financial needs,” he says.
Some analysts warn that advisers who do not make their clients aware of the opportunity to put a policy in trust might open themselves to complaints with the ombudsman and potentially legal action.
Smart says: “It is an element of treating customers fairly. Advisers should at least be drawing clients’ attention to the tax consequences for an estate.”
Gaeia Partnership director Brigid Benson says providers should also do more to promote the take-up of trusts. She also points out that trust forms could be better designed. “There could be a box written in bold on the quotation form where you can clearly see the options or there could be an information sheet attached,” she says.
Carr says Lifesearch tried issuing its own trust form but the idea was dropped due to provider reluctance to accept external legal text. He says he would advocate industrywide standardisation of trust forms.
“A standardised form could work if we could get the insurers to agree the wordings,” says Carr.
However, the Association of British Insurers does not endorse such a move. It says although provision of standard forms and terms might make access to trusts easier, a trust may not always be the most appropriate choice. Assistant director of financial regulation and taxation Sarah Knight says: “The ABI does not get involved in promotion of the use of certain product types, whether trusts or tax-efficient wrappers. That is for our members.”
As customers opt to select life insurance on the internet rather than through an adviser, commentators fear that the numbers writing their policy in trust will fall further. Knight says: “We always recommend that customers who are unsure should seek advice but equally believe that customers should have the widest possible choice in how they buy insurance products.”