Life Assurance in Trust: Why get it checked by a specialist?

Those who are regular readers of our Private Wealth & Inheritance articles, might have noticed that we don’t recommend DIY law. Most people assume that this is because we have a vested interest in doing the work that people increasingly seek to do without our assistance. While on the one hand we do benefit from helping clients make a Will, as a firm we also see great returns, now more than ever, from the increase in people who have been told it is easy and much cheaper to do your own, only for their family to see the DIY Will being contested and then ending up with our Dispute Resolution specialists. Home-made Lasting Powers of Attorney have a similar unfortunate reputation. In addition to the problems of litigation that plague home-made legal documents there is the secondary issue that they do not always achieve what was desired or intended.

Making a Home Made Trust

However, this article is not going to talk about Wills or Lasting Powers of Attorney rather it is concerned with Home made trusts. These are not any trusts, they are ones that are often linked to life assurance products. These products are frequently an important part of a tax planning strategy. More often than not the idea is that you take out some form of life assurance, frequently linked with an investment. This is then written in trust for the benefit of your children or grandchildren and if all goes well the benefit of the policy passes free of inheritance tax.

Most insurance companies have standard trust documents that are linked to these products, these are usually highly technical and not easy to understand, but more often than not have been very carefully written by highly experienced lawyers. The problem is that they leave gaps for you, the client to fill in with the names of the beneficiaries. Frequently there are two different sets of beneficiaries who have to be named, one set are what we call “Discretionary Beneficiaries” who are usually a group of different family members who could benefit but probably won’t. The other beneficiaries are usually the “Default Beneficiaries” who are usually the people who are expected and intended to benefit. In addition more often than not there is a need to appoint trustees who are responsible for dealing with any claim under the policy and with making payment to your intended beneficiaries. Lastly the forms usually require you to state to which policy the Trust relates.

Who’s checking the details are correct?

Insurance companies usually issue some written guidance with their forms but to the non legal mind this can often be difficult to follow. The financial advisers who set up these policies are not lawyers and quite rightly are usually reluctant to assist with the completion of trust documentation. This tends to mean that very often it is the client who is left to complete these forms with very limited assistance.

Over the years I have seen a number of these forms which have been completed wrongly or only partially completed. The most common faults are not to enter the names of the correct beneficiaries, not to date the documents, not to get them properly signed and not to insert the policy number of the insurance policy to which the trust relates. Fortunately, in the cases that I have encountered it has been very clear what was intended and luckily everybody including the insurance company was happy to go along with this. However, every once in while it does not work like that.

Relying on common sense for a positive outcome

One of the first occasions that I encountered this was more than 30 years ago when the proceeds of the policy formed part of the estate of a deceased beneficiary instead of passing to his children. Instead of saving inheritance tax this was going to result in additional tax. By luck rather than judgement it was possible to do a Deed of Variation diverting the policy proceeds to the intended beneficiaries and thereby avoid the tax, but it was a lucky escape. In the last couple of months I have encountered a situation arose where the trust was unclear as to who was supposed to benefit when one of the intended beneficiaries died before the insurance policy matured. Putting this right could have been an expensive issue but fortunately the family agreed a scheme of distribution that avoided this.

Not everything about this is bad news. A recent court case considered the position where an insurance policy in which a few the common errors referred to above had happened. The court decided that the common sense approach applied and that so long as it was clear what was intended then that should be allowed to happen. However, it was a close run thing, in particular there was a deed of assignment which if it had been deemed invalid would have defeated the whole tax planning exercise.

Why get it checked by a specialist trust lawyer?

In view of the sums involved, which can be quite substantial, and the increasingly aggressive attitude of HMRC, it has always been our best practice to recommend that if you are entering into this sort of financial planning, then you should get the Trust documentation checked by a specialist Trust lawyer. He or she can help to ensure that the forms are completed signed and dated correctly, and also that thought is given to what is to happen should one of the intended beneficiaries have died prematurely. The cost may be unwelcomed, but it is probably far better than the alternatives of an unexpected tax or court bill.

For further advice or to arrange an appointment please contact a member of the Private Client team.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

Graeme Black
Partner, Private Wealth & Inheritance
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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