What is a trust?

A trust allows you to give property to someone without letting them have immediate access to it. Different types of property can be put into trust including buildings, cash, shares and life assurance policies. Any trust deeds ReAssure provide relate to life assurance and some pension policies.

The person who puts their property into trust is known as the settlor (for flexible or discretionary trusts) or the donor (for absolute trusts). They choose the people who they want to benefit from the trust (known as the beneficiaries).

The trustees are the people chosen to administer the trust and control the trust fund. They must comply with the trust rules and the law to look after the trust fund and use it for the benefit of the beneficiaries. In most cases the settlor/donor of a trust is automatically a trustee. When they set up the trust they can also appoint additional trustees to help them administer it.

Once you’ve put a policy into trust you can’t change your mind as it’s a legally binding agreement which changes the ownership of the policy held in the trust. You can sometimes cancel a trust with a Court’s permission, but you would need to seek your own legal advice to do this.

The usual way to set up a trust is to complete a written declaration, which provides a permanent record of the exact terms of the trust. The declaration of trust will identify the beneficiaries or classes of beneficiaries and the trust property. It will also formally give the legal ownership of the trust property to the trustees and set out the rules about how they can deal with it. The settlor/donor can also complete a document to appoint any additional trustees.

Any adult of sound mind can be a trustee. It’s sensible to choose people who are easy to contact and who you’re likely to keep in touch with, as being a trustee can be a long term commitment. It’s also best to have trustees who are resident in the UK so there are no foreign tax implications (when a trust is set up we’ll ask all the trustees to fill in a form to confirm their tax residency). A beneficiary of a trust can also be a trustee.

A company can act as a trustee, which can overcome problems that sometimes arise when individual trustees die or retire, or when they lose contact with the settlor/donor – a company acting as a trustee continues to exist if an individual employee who administers a trust leaves. Many banks have trust companies who will administer trust funds, although they will charge for their services.

In England, Wales and Northern Ireland a partnership cannot act as a trustee. For example, if you wish to appoint an individual partner in a firm of solicitors as a trustee, that partner will remain a trustee if they leave the partnership, unless they resign the role.

If you are a settlor/donor you should choose additional trustees who are likely to act broadly in line with your wishes and within the terms of the trust. Your choice is particularly important if you’re setting up a discretionary or flexible trust, as these allow the trustees wide discretion over who eventually receives the trust fund.

Under English law, all the trustees of a trust must act unanimously unless the trust deed explicitly allows for majority decisions to be made.

For a life or pension policy under trust the trustees need to sign the trust form when it’s originally set up and eventually receive the money from the policy and pay it to the beneficiaries.

However, a trust doesn’t necessarily end when the insurance company pays the money from the policy to the trustees. The terms of the trust might require the trustees to reinvest the trust fund if, for example, the beneficiaries are under 18. This could make a trustee’s duties more demanding.

Trustees are not expected to have any specialist knowledge, but they need to make sure they reinvest the trust fund appropriately and they may need to take investment advice. The duties and responsibilities of trustees are set out in the Trustee Act 2000. The trustees will have no liability for any loss to the trust fund as long as they act in good faith.

The settlor/donor is automatically a trustee for most trusts. You should appoint at least one other trustee so that there is someone to administer the trust if you die or become unable to deal with the trust. Ideally, there should be two additional trustees.

The trustees are joint legal owners of a policy so we’ll need all the trustees to agree on a change to the policy before we can complete it.

You can appoint new trustees during your lifetime to replace an existing trustee who dies or wishes to retire. We can provide example deeds to make these changes.

You can name any individual, charity or legitimate organisation as a beneficiary of a trust. Discretionary Gift Trusts usually include a list of potential or discretionary beneficiaries. If you use a Discretionary Gift Trust you should make sure the people you want to name as beneficiaries are included in the list of potential beneficiaries. You don’t have to name specific beneficiaries when the trust is set up.

A Flexible Trust is similar, but it also includes named default beneficiaries who would receive a portion of the trust fund if you were to die now. Discretionary beneficiaries won’t receive anything unless they are appointed by the Trustees.

If you use an Absolute Trust, you appoint fixed beneficiaries at the start. You won’t be able to change the beneficiaries once the trust has been set up. If you use a Discretionary or Flexible Gift Trust, you will be able to change beneficiaries by choosing replacement or additional beneficiaries from the list of discretionary beneficiaries.

Why put a policy into trust?

There are several advantages to putting a life assurance policy in trust:

Quicker payment of benefits

To avoid having to apply for probate when the settlor/donor dies, a policy must be legally owned by someone else. If a policy is in trust and the life assured dies, we‘ll pay the trust fund to the surviving trustees as soon as we’ve seen the death certificate plus any supporting documentation. If a policy isn’t in trust, we may not be able to pay out the money until the life assured’s personal representatives send us a grant of probate or grant of letters of administration. It can take several months to get these documents after someone dies.

A grant of probate is issued by a court to confirm a will is valid after the person who made it dies. This allows whoever is dealing with the person’s estate to wind it up and distribute it to the beneficiaries of the will. A grant of letters of administration is issued by the court where there is no will or someone other than the executor named in the will is dealing with the estate.

Reducing Inheritance Tax

It may be possible to minimise the effect of Inheritance Tax (IHT). This will depend on the type of trust you use and the value of the policy or the amount of the premiums.

In certain circumstances, placing a policy into a Discretionary or Flexible Trust may, in itself, give rise to a potential IHT liability.

You must rely on the advice of your own professional legal or financial advisers to make sure a trust is suitable for your personal circumstances before you set it up.

Flexibility and control

If you put a policy into trust you’re agreeing to give the benefits to someone else (the beneficiaries) without giving them immediate access or any control. You may want to do this because the beneficiaries are minors or because they’re not capable of dealing with their own affairs. You may also put a policy into trust because it gives you the flexibility to change or add beneficiaries in the future.

The disadvantages of a trust

You should carefully consider whether placing a policy in Trust is right for you. There are potential disadvantages of placing a policy in Trust, such as:

  • You lose control of the policy beyond paying premiums and selecting investment funds.
  • You won’t be able to use the policy for another purpose, such as security for a loan, as you won’t have a right to the money held within the policy.
  • There will be additional requirements at the point of claim.
  • If you were to lose touch with a Trustee this can add complications. You should choose your Trustees carefully, as you may need legal advice if you lose touch with them and need to make a claim.

What types of trust are there?

There are several different types of trust which we’ve described below. There’s more information about these trusts and how they work available in our example trust packs. You should seek legal advice about which type is best for your circumstances:

Absolute Trust

An Absolute Trust sets the beneficiaries and the proportion of the trust fund they’ll receive when the trust is set up, and can’t be changed. This type is trust is therefore only suitable if you’re sure you won’t change your mind about the beneficiaries of the trust.

Discretionary Trust

A Discretionary Trust allows the trustees completion discretion over who receives the money from the policy when it’s paid out. Beneficiaries can be named when the trust is set up, but it’s not guaranteed that they’ll receive any of the trust fund. Beneficiaries can be changed at any time in a Discretionary Trust.

Flexible Trust

A Flexible Trust is similar to a Discretionary Trust, but includes both default beneficiaries and discretionary beneficiaries. The default beneficiaries automatically receive a portion of the trust fund, while the discretionary beneficiaries will only benefit if the trustees choose for them to do so.

Survivor’s Discretionary Trust

A Survivor’s Discretionary Trust always has two settlors who are also the lives covered by the policy. If both of the settlors die within 30 days of each other, the trustees will pay out the trust fund to the beneficiaries (the beneficiaries are set up similarly to those for a standard Discretionary Trust). However, if one of the settlors survives the other by more than 30 days, the trust fund is paid to the surviving settlor.

Registration of trusts with HMRC

Since 2017 UK express trusts (those that are intentionally or deliberately created) with a tax liability have been required to register with HMRC’s Trust Registration Service (TRS). In 2020 these requirements were extended to include non-taxable trusts, although TRS was only able to accept registrations from these trusts from 1 September 2021. There are a number of exemptions from these requirements.

Trusts are required to register with TRS to ensure they comply with UK anti money laundering legislation, and to ensure that they obtain a Unique Taxpayer Reference (UTR) from HMRC.

What types of trust need to register?

Taxable trusts

A trust must register with TRS if it becomes or is liable for Capital Gains Tax or Income Tax.

If the trust already has a UTR because it has been taxable in an earlier year, it must still register as a taxable trust.

Trusts may also be liable for the following taxes:
• Inheritance Tax
• Stamp Duty Land Tax
• Stamp Duty Reserve Tax
• Land and Buildings Transaction Tax (in Scotland)
• Land Transaction Tax (in Wales)

These trusts must be registered on TRS as non-taxable trusts unless they also have an Income Tax or Capital Gains Tax liability in which case they must register as taxable trusts. HMRC will send the trust a Unique Reference Number (URN), which is different to a UTR.

If the trust does not need to register for any reason other than having a liability to UK tax, it does not need to register if:
• it has to pay Income Tax of less than £100 on interest
• only the settlor or beneficiary of the trust has to pay tax
• it’s a bare trust
• it holds a pension scheme already registered with HMRC.

Non-taxable trusts

The following types of trusts must register with TRS even if they have no liability to Income Tax or Capital Gains Tax:
• all UK express trusts — unless they are specifically excluded (see below).
• non-UK express trusts, such as trusts that:
• acquire land or property in the UK
• have at least one trustee resident in the UK and enter into a ‘business relationship’ within the UK.

If the trust is not resident in the UK (‘non-resident trusts’), you must register the trust if it becomes liable for tax on income coming from the UK or on UK assets.

Exemptions to registration for non-taxable trusts

Some types of non-taxable trust are exempted from the requirement to register with TRS:
• a trust is used to hold money or assets of a UK registered pension scheme — such as an occupational pension scheme
• a trust is used to hold life or retirement policies providing that the policy only pays out on death, terminal or critical illness or permanent disablement, or to meet the healthcare costs of the person assured
• a trust that is holding insurance policy benefits received after the death of the person assured — as long as the benefits are paid out from the trust within 2 years of the death
• a charitable trust that is registered as a charity in the UK or which are not required to register as a charity
• a ‘pilot’ trust set up before 6 October 2020 and holds no more than £100 — pilot trusts set up after 6 October 2020 will need to register
• a co-ownership trust set up to hold shares of property or other assets which are jointly owned by 2 or more people for themselves as ‘tenants in common’
• a will trust created by a person’s will and come into effect on their death providing they only hold the estate assets for up to 2 years after the person’s death
• a trust for bereaved children under 18, or adults aged 18 to 25, set up under the will (or intestacy) of a deceased parent or the Criminal Injuries Compensation Scheme
• a ‘financial’ or ‘commercial’ trust created in the course of professional services or business transactions for holding client money or other assets.

HMRC registration deadlines

The trustees must register a non-taxable trust in existence on 6 October 2020 by 1 September 2022.

The trustees must register a non-taxable trust created after 6 October 2020 within 90 days of being created or otherwise becoming registerable, or by 1 September 2022 (whichever is later).

For taxable trusts the registration deadline depends on:
• when the trust was created
• the tax the trust is liable for
• if it has been liable for Income Tax or Capital Gains Tax before.

The trustees are also required to update TRS with any changes to information held on the register within 30 days of becoming aware of the change.

Guidance and legal advice

You can find more information about TRS, exemptions to the registration requirements and the registration deadlines in HMRC’s Trust Registration Service Manual or you can speak to your professional adviser. ReAssure is unable to provide legal or tax advice to trustees, policyholders or their advisers.