Ian Smart – Product Architect, Royal London
Whether or not a client’s life policy should be written in trust is something every adviser should consider. And there are times when writing a plan in trust is essential for the plan to achieve its objectives – for example, relevant life policies.
These are life policies taken out by an employer to provide death in service benefits for an employee and their family. But to make sure the plan benefits are paid to the right people, the plan must be written in trust. And for maximum tax efficiency, the trust must be in place before the plan starts.
Therefore, it’s important when writing these policies that all the necessary ‘paperwork’ is completed at the right time. But, of course, the vast majority of life insurance applications are no longer made using a paper process. So it makes sense to have the option to create trusts online. Now online trusts aren’t new – they’ve been available to advisers and their clients for several years in different forms. They range from allowing the necessary information to be entered into a pdf document which can be printed and wet signatures applied, to online data entry to generate a form which is then circulated to all parties for digital signatures. But there are also signature free versions where, by following the right process, an adviser can create the trust on behalf of their clients, at the same time as submitting their application.
How does this work?
To create any trust there are three things needed – known as the three certainties.
- It must be certain there is an intention to create a trust. The key test is to consider whether the creator of the trust wanted someone to be responsible for holding property to benefit another person. For an online trust, this means the client must have been able to review the proposed trust wording and confirmed their intention to their adviser that this is the trust they agree to create.
- The subject matter of the trust must be certain. The subject matter is the property that will be held under the trust. For a life policy, this is achieved by identifying the policy in the wording of the trust by inserting the policy number or application date.
- The subject of the trust must be certain. The subject is who will benefit. This can be achieved simply by including the complete list of possible beneficiaries within the trust.
The traditional approach is to evidence all of this in a deed. But the legal requirements to create a valid deed are quite onerous, including the need for the deed to be signed by the settlor and for their signature to be witnessed. For a policy that is already in force, this is the only way the trust can be created as the legal ownership of the policy must be transferred to the trustees, which can only be done by deed.
But, for a new policy, it is possible to create a trust simply by asking the insurance company to issue the policy to the trustees from the plan’s start date. This doesn’t involve an assignment and therefore doesn’t require a deed or a signature, as long as the three certainties are present.
A new, signature-free process
At Royal London we now give you a choice as to how and when you complete the trust form for a relevant life policy.
- You can complete the traditional paper form – we recognise that some people still like to have that piece of paper with wet signatures.
- You can complete the form electronically and ask your client and their trustees to sign it electronically. Both of these methods can be used if you’ve already submitted an application to us and haven’t yet completed a trust form.
- Or you can go signature free, completing the information needed to create the trust on your client’s behalf at the same time as you complete their online application.
This signature free method asks for the same information as the others but you won’t have to re-enter anything you’ve already told us and we’ll send a copy of the completed trust to the plan owner and their trustees as soon as you submit the application. We’ll also note your client’s trust in our records automatically so you can be sure we’ve received it with no risk of the form going missing in the post.
But remember, whichever method you choose, it’s essential for the trust to be completed before the plan starts to ensure the benefits are paid to the right people and gain maximum tax efficiency.
Find out more about our Relevant Life trust.