Find out more about trusts
The reasons we have listed for putting all or part of a plan or cover into a trust, do not mean that a trust is right for everyone. It’s a good idea to get advice from a financial or legal adviser before you make a decision. If you want to be able to benefit from something that you’re thinking of putting into a trust or if you think you might want to have access to it in the future, then a trust may not be right for you.
You can have a trust written by your solicitor, but many insurance companies have ‘ready-made’ trusts available for the life insurance policies they offer. These trusts are not usually suitable for anything other than life insurance plans. We would recommend that you take legal and/or financial advice if you intend setting up a trust.
Terry Massey - MDFS
Bare / Absolute Trust
The simplest form of trust; sometimes called a Fixed or Plain trust. Once you have written an absolute / bare trust it cannot be changed. The settlor decides who the beneficiaries are and what they want each of them to receive. From then on the property in the trust and any profits from it belong to the beneficiaries listed in the trust.
As the beneficiaries and their benefits are fixed in a bare trust, it is not possible to add beneficiaries in the future, even if the settlor were to have more children or grandchildren. Once a plan is in a bare trust, the settlor can’t benefit from it.
So, a bare trust isn’t suitable for a plan that includes any cover that would pay a benefit to the settlor, if a claim were made, while they were alive.
For example, a plan that includes Income Protection or Critical Illness Cover, isn’t suitable for a bare trust. With a bare trust, the trustees can’t make any beneficiary over the age of 18 wait before they receive property that the trust is holding for them. This can be a concern if the beneficiaries are young and the trustees think they should wait before they receive the trust property.
A discretionary trust relies on the discretion of the trustees.
In a bare trust the assets must be distributed to beneficiaries who are over 18 if they ask for them; but with a discretionary trust the trustees can retain assets until they think it is the right time for them to be distributed.
The trustees can choose who will benefit and how much they benefit by. It is important, therefore, that you help the trustees by indicating who you would like to benefit from your plan, either by naming them as potential beneficiaries of the Trust, or by completing an Expression of Wishes form, which can be kept with the Trust form.
The Expression of Wishes is not a legally binding document, but it will help to guide the trustees when the time comes for them to distribute the Plan benefits to the beneficiaries.
Unlike a bare trust, new beneficiaries can be added to the trust or removed from it. This can be useful if, for example, the settler has another child or grandchild, or if they fall out with someone they previously wanted to benefit from the trust.
A split trust allows the settlor to split their plan so that they retain some of the benefits and some are put into trust.
With a split trust, the benefits of the life cover would have to be paid into the trust, but the settlor could choose to retain other benefits, including the terminal illness element of their life cover.
Other retained benefits are likely to be things like Income Protection, Critical Illness Cover and Optional Unemployment; the sort of covers that are designed to help protect the settlor’s lifestyle.
Trust Beneficiaries can be added and trustees appointed or removed, but only with the approval of the trustees.
As with a discretionary trust, one of the risks of a split trust is the power that the trustees have. This is one of the reasons why it is important to choose the right trustees.
A flexible trust is a trust where there are two types of beneficiaries. The first type of beneficiary is the default beneficiary.
These beneficiaries are entitled to any income from the trust as it arises.
The second type of beneficiary is the discretionary beneficiary. These discretionary beneficiaries only receive capital or income from the trust if the trustees make appointments to them during the trust period. If no appointments are made by the end of the trust period, the default beneficiaries will receive all of the benefits