Your guide to Protection Trusts

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Making the most of your Aviva protection plan

Nobody likes to think about what will happen when they have gone. You’re already thinking ahead by having a protection plan in place to help the ones you love after your death.

Now you need to go a step further to make sure that the money from your plan:

l is paid out exactly when it’s needed

l goes to exactly who you want to receive it

l isn’t reduced by unnecessary inheritance tax.

If you spend an hour or so planning ahead now, you can make sure that those you love receive the money you’ve arranged for them quickly and without paying excessive tax.

The good news is that you can achieve all this by putting your plan under trust.

4 Your guide to Protection Trusts

The basics about trusts

Not many people have much involvement with trusts, so let’s start with the basics.

What is a trust?A trust is simply a way of giving some property (such as your Aviva life insurance plan) to other people without giving them full control over it.

A trust separates the legal owner(s) of the plan from the people who benefit from it. With a trust, the original owner of the property passes legal ownership to another group of people, who look after property for the person or people who are to benefit from the trust.

Who’s involved?Settlor The settlor is the legal name given to the person who sets up the trust and transfers the trust property into it.

TrusteesThe trustees are the legal owners of the trust property. They are legally bound to look after the property in line with the terms and conditions of the trust. It’s their duty to hold and look after the trust property on behalf of the people who will ultimately benefit from it.

If you put an Aviva life insurance plan under trust, you will be the settlor. You’ll also automatically become a trustee. We recommend that you appoint at least one other trustee to help you look after the trust.

BeneficiariesThe beneficiaries are the people who will receive any benefits from the trust. In this case, that means any payout from the insurance plan.

The beneficiaries can’t deal directly with Aviva because they do not legally own the life insurance plan that forms the trust property. However, the trustees will deal with the plan on behalf of the beneficiaries, as detailed in the terms and conditions of the trust.

Trust propertyWith a protection trust like we’ll outline in this guide, the trust property is a life insurance plan.

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Why should you put your life insurance plan under trust?

There are a number of reasons why it’s often a good idea to put your life insurance plan under trust:

l Your beneficiaries should receive the money quickly. Once we’ve accepted the claim, we can pay the money from your plan directly to the surviving trustees who can pass it to the beneficiaries when they need it most.

l As the settlor, you can name the person or people you want to receive the money from your plan. The trustees can pay those people as soon as they receive the money from us.

l As the settlor, you’ll automatically become one of the trustees, so you keep an element of control over your life insurance plan.

l Using our suitably worded trusts, your life insurance plan won’t be counted as part of your estate when you die. This means the trustees will be able to pay the beneficiaries without having to pay inheritance tax on the money from the plan. Not all trusts are IHT effective.

l HM Revenue & Customs (HMRC) treat the premiums you pay as gifts as far as inheritance tax is concerned, but they will often be exempt. This can be a good way of using your inheritance tax exemptions.


When is a trust unsuitable?

A trust may not always be the best option for you. When you’re considering putting your life insurance plan under trust, you should also think about these points:

l You can’t place your life insurance plan under trust if you’ve assigned it to a lender (for example, your mortgage provider) as security for a loan.

l If you name yourself as a potential beneficiary, the plan will not be outside your estate for inheritance tax as HMRC then consider it to be a gift with reservation of benefit. This is because you are also the settlor.

This means that the money from your plan will be included in your estate for inheritance tax calculations when you die, even if you haven’t received any money from it during your lifetime. So you should not name yourself as a beneficiary of your protection policy trust.

Your plan won’t be treated as a gift with reservation of benefit if you choose to receive any payout from your life insurance plan for critical illness or mortgage payment protection.

Gift with reservation of benefitA gift which is not fully given away, so that the person getting the gift does so with conditions attached or the person making the gift keeps back some benefit for themselves.

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Trusts from Aviva

We have more than one specimen trust that you can use with a protection plan. The trusts cover most circumstances, so there’s likely to be one that will meet your needs.

Aviva Discretionary Gift Trust (Protection)This trust is very flexible. Your trustees can choose from a wide range of beneficiaries (such as your children and grandchildren). Even children or grandchildren born after the trust is set up can benefit.

You can also add to the range of potential beneficiaries (e.g. by adding your nieces or nephews), any of whom could receive money from the plan. This means that if circumstances change, the trustees can agree to give one or more of the potential beneficiaries a share of the money from the plan. You should tell the trustees (ideally in writing) how you’d like the plan proceeds divided amongst the beneficiaries, and of course you can change this at any time.

Aviva Survivor Trust This trust is suitable for you if your plan covers two people (for joint life, first death).

It’s common for couples to have a life insurance plan that covers both of them and pays the surviving partner when the other one dies. However, this type of plan can cause problems in these scenarios:

l Both partners die at the same time, in an accident for example If a couple covered by the same plan die at the same time, we’ll pay the money from the plan to the younger partner’s personal representatives and it will become part of their estate for inheritance tax. There’s also likely to be a delay before the beneficiaries receive the money and they may also have to pay inheritance tax on it.

l The surviving partner dies very soon after their partner If a couple covered by the same plan die very close together, we’ll pay the money from the plan to the personal representatives of the second of the two to die. This means that the money will be part of that person’s estate. Because of this, the beneficiaries may have to wait to receive the money and they may also have to pay inheritance tax on it.

The Aviva Survivor Trust can help in both of these situations. If you put your joint life insurance plan under this trust, the trustees can pay the money to the surviving husband, wife or civil partner as long as they are still alive 31 days after the death of their partner.

If the surviving partner dies within 31 days of the other partner, the trustees will pay the money from the plan to the couple’s children. They won’t have to pay any inheritance tax on the money as part of either partner’s estate.

Aviva Married Women’s Property Act Trust This trust is most suitable for an individual who takes out a life insurance plan on their life alone and wants to put it in trust for their spouse, civil partner and/or children. However, although this trust is named after the Married Women’s Property Act, you don’t have to be married or a woman to set up this trust.

It’s less flexible (because of the restriction on who can be a beneficiary) than the Aviva Discretionary Gift Trust (Protection), so you should only really consider using it if you’re certain that you won’t change your mind in the future.

You can only name your spouse, civil partner and/or children as beneficiaries. For this trust, when we say children, we mean your biological or adopted children. You can’t name any step-children (unless using the Northern Ireland equivalent trust) or grandchildren as beneficiaries.

This trust will also protect your life insurance plan from your creditors if you, as the settlor, are declared bankrupt. However, you should bear in mind that if you place the plan under trust in an effort to defraud potential creditors, they will be able to claim the premiums you’ve paid for this plan. Also, your protection plan will have no significant value (and hence be of little interest to creditors) whilst you are in good health.


Tax and trusts

Here, we’ll outline the tax position of trustees of a life insurance plan held in either the Aviva Discretionary Gift Trust (Protection) or the Aviva Survivor Trust.

Both trusts give the trustees the power to invest money. As the trusts only hold life insurance plans, the trustees will only be able to use this power after they have made a claim on the plan. If that happens, we recommend that the trustees talk to a professional adviser for advice on the best way to invest the money if they’re not paying it straight out to the beneficiaries. An adviser would also be able to give the trustees more information on the tax implications for any investment they recommend.

The information we’ve given here is based on our understanding of the tax laws in place at the time of writing (November 2012). Please bear in mind that tax laws may change.

UK inheritance taxSetting up a trustIf you put your life insurance plan into either an Aviva Discretionary Gift Trust (Protection) or an Aviva Survivor Trust, HMRC will treat it as a chargeable lifetime transfer.

When you set up the plan, you’re likely to be in good health, so the value of the plan will be nil. This means that there will be no charge to inheritance tax.

For the two trusts we’re talking about, you can place any existing plan you have into trust. If you do that and the plan is anything other than a term assurance plan (e.g. if it’s a whole of life plan), the value of the chargeable lifetime transfer when you create the trust will be the greater of:

l the open market value of the policy when the trust is created (if you’re in good health, the surrender value will give you a good idea of this value)

l the total amount of the premiums paid up to the time you create the trust.

For a term assurance plan, only the open market value counts. The surrender value of a term assurance plan is usually nil, but it still can have an open market value. This would be the case if the person covered by the plan is in poor health and likely to die before the end of the plan term.

The premiumsIf you put your life insurance plan into a trust and can no longer benefit from it, HMRC will treat the premiums you pay as gifts as far as inheritance tax is concerned. These premiums will normally be exempt from inclusion in any inheritance tax calculation under the normal expenditure from income exemption or the annual inheritance tax exemption of £3,000.

If your premiums are large and not fully covered by any inheritance tax exemptions, HMRC will treat them as chargeable lifetime transfers.

The money from the planThe trustees can pay the money from the plan to the beneficiaries without it forming part of your inheritance tax estate as long as you (the settlor) are not named as a beneficiary.

Tax on chargeable lifetime transfers and the ongoing trustIt’s possible that, as the settlor, you may make a chargeable lifetime transfer when you set up a trust or pay the premiums for the plan under trust. It’s unlikely, though, as your trust will only hold a life insurance plan.

You may have to pay some inheritance tax if the total value of all your lifetime transfers in any seven-year period is more than the nil rate band (£325,000 for tax years from 2010/2011 to 2014/2015). If this happens, you would pay inheritance tax on the amount above the band at half the death rate. Because the tax you pay is also treated as a gift, you will effectively pay tax at 25% on the excess.

The Trustees may have to pay periodic inheritance tax charges on your trust at ten-year intervals after you set it up. This will only happen if the value of the trust is higher than the nil rate band at that time. As your trust will only hold a protection plan, the value will be very small as long as you’re in good health. This means it’s unlikely that there will be any tax charge.

If there is a charge, when the trustees calculate the tax, they’ll take into account any chargeable lifetime transfers you’ve made in the seven years before you set up the trust. You’ll pay inheritance tax on 30% of the amount over the nil rate band at half the death rate (20%). This means that you will effectively pay inheritance tax at 6%, but only on the value in excess of the nil rate band.

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The trustees may have to pay exit charges when they pay the money from the plan to the beneficiaries. This will happen if trustees paid an inheritance tax charge at the last 10-year anniversary or at the start of the trust if that was less than 10 years ago. Again, this is unlikely to happen with a protection policy trust.

If you die within seven years of making a chargeable lifetime transfer, the value of that transfer will become chargeable to inheritance tax at the rate applying on death (currently 40%). Any tax payable on death will be reduced by any tax that was payable when the transfer was made.

Neither the trustees nor the beneficiaries will normally have to pay inheritance tax on the money from the plan as it is not part of your estate.

If you have a spouse or civil partner but take out a life insurance plan on your life only, don’t pay the premiums from a joint account as this may affect the inheritance tax position.

If you and your partner set up the life insurance plan and trust together, you can pay the premiums from a joint account. However, you shouldn’t name yourselves as beneficiaries because this will affect the inheritance tax position.

If you make chargeable lifetime transfers of more than £325,000 (the current nil rate band) in the same tax year or in the seven years before setting up the trust, you should complete forms IHT100 and IHT100a and send them to HMRC. The trustees should also complete IHT100 and either IHT100c or IHT100d when they report an exit or periodic charge.

The inheritance tax rules for trusts are complicated, so we’ve only given a short summary based on our current understanding. If you want to know more, please talk to a professional tax adviser or visit the HMRC website: www.hmrc.gov.uk.

UK income taxThe trustees will only have to pay income tax on the money from the life insurance plan if the cash-in value is more than the total value of the premiums you have paid.

This is unlikely to happen with a protection plan, so the trustees don’t usually have to pay income tax.

UK capital gains taxTrustees don’t generally have to pay capital gains tax on the money from life insurance plans held in a trust.

The case of John BlackJohn Black is married with two young children. On the advice of his financial adviser, he takes out a term assurance policy for £400,000 and writes this under a Discretionary Gift Trust (Protection) for the benefit of his children.

As the death benefit from this policy won’t be part of his estate, it won’t be subject to inheritance tax. Also if John dies, we can pay the money from the plan to John’s surviving trustees as soon as we accept the claim. We won’t need to wait for probate or other grant of representation.

The value of the policy is nil when John creates the trust as he is in good health. Because of this, there is no chargeable lifetime transfer and no need to complete an IHT100 form. In this instance, John’s premiums are exempt under the normal expenditure exemption and not treated as chargeable transfers.

As long as John is in good health at every 10-year anniversary, the policy will have little or no value. This means there won’t be a periodic charge to inheritance tax. If John dies and we pay the claim before the next 10-year anniversary, there won’t be an exit charge (provided the trustees distribute the money before the next 10 year anniversary).

Reduce inheritance tax even moreJohn can reduce any potential inheritance tax by taking out two separate life insurance plans for £200,000 each and putting them under separate trusts starting on different days. Each trust will then have its own nil rate band to set against the value of the policy.


Questions and answers

1. Who is the settlor? The person or people who set up the trust. They should be

18 or over and of sound mind.

2. Who can be a trustee? You can appoint any adult who is of sound mind as a

trustee. You can also appoint a trust company. There are a number of things to bear in mind when you appoint your trustees and you should speak to your own professional advisers about this. With the protection trusts, as the settlor, you automatically become a trustee. We recommend that you appoint at least one other trustee.

3. Who has the power to change the beneficiaries under the trust?

As the settlor, you can choose who will benefit from the trust when you set it up. You can also change the beneficiaries. When you die, any surviving settlor can change the beneficiaries. When all the settlors have died, the trustees can change the beneficiaries until the trust ends.

4. Can a husband and wife or civil partners each take out their own trust arrangements?

Yes, but we recommend that you discuss this with professional advisers first as it could remove any inheritance tax advantage.

5. Can a husband and wife or civil partners establish a trust jointly?

Yes, you can do this with the Aviva Discretionary Gift Trust (Protection) or the Aviva Survivor Trust. The Aviva Married Women’s Property Act Trust is only suitable for life insurance plans that only cover one person.

6. Can I use the trust with existing life insurance plans?

Yes, you can put an existing life insurance plan under trust using the Aviva Discretionary Gift Trust (Protection) or the Aviva Survivor Trust.

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Talk to a professional adviser

Please don’t take the information in this booklet as advice. If you’re thinking of putting your life insurance plan under trust, make sure you talk to a professional adviser. They will be able to give you advice on your own circumstances and tell you whether using a trust would be the best thing for you to do.

It’s important that you get professional advice because:

l there are both tax and legal consequences when you set up a trust

l you can’t cancel a trust once you set it up

l the trustees have a special duty to the beneficiaries and will be personally liable for any loss the beneficiary may suffer if the trustees use their powers wrongly.

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Changes to tax law

We’ve based all of our tax information on our understanding of current legislation and HM Revenue & Customs’ practice. Both of these could change in future, which may lead to you paying tax.

We’ve been as accurate as we can, but neither we nor our representatives can accept responsibility for loss you or anyone else may suffer if you act or don’t act based on any information we’ve given.

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PT 15 460 11/2013 © Aviva plc

Aviva Life Services UK Limited. Registered in England No. 2403746. 2 Rougier Street, York, YO90 1UU.

Authorised and regulated by the Financial Conduct Authority. Firm Reference Number 145452.

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Your guide to Protection Trusts - Policy Healthcheck

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