Your guide to Protectio Trusts
Protectio Makig the most of your Aviva protectio policy Nobodylikestothikaboutwhatwill happewhetheyhavegoe.you realready thikigaheadbyhavigaprotectiopolicy iplace,whichcouldhelptheoesyoulove after your death. If you sped some time plaig ahead ow, you could make sure that those you love receive the moey you ve arraged for them quickly ad without payig excessive tax. The good ews is that you could potetially achieve all this by puttig your policy uder trust. Nowyoueedtogoastepfurthertohelpmakesure that the moey from your policy: is paid out exactly whe it s eeded goes to exactly who you wat to receive it is t reduced by uecessary iheritace tax. 02
The basics about trusts Notmaypeoplehavemuchivolvemet withtrusts,solet sstartwiththebasics. What is a trust? A trust is simply a way of givig some property (such as your Aviva life isurace policy) to other people without givig them full cotrol over it. A trust separates the legal ower(s) of the policy from the people who beefit from it. With a trust, the origial ower of the property passes legal owership to aother group of people, who look after property for the perso or people who are to beefit from the trust. Who s ivolved? Settlor The settlor is the legal ame give to the perso who sets up the trust ad trasfers the trust property ito it. Trustees The trustees are the legal owers of the trust property. They are legally boud to look after the property i lie with the terms ad coditios of the trust. It s their duty to hold ad look after the trust property o behalf of the people who will ultimately beefit from it. If you put a Aviva life isurace policy uder trust, you will be the settlor. You ll also automatically become a trustee. We recommed that you appoit at least oe other trustee to help you look after the trust. Beeficiaries The beeficiaries are the people who will receive ay beefits from the trust. I this case, that meas ay payout from the isurace policy. The beeficiaries ca t directly deal with Aviva because they do ot legally ow the life isurace policy that forms the trust property. However, the trustees will deal with the policy o behalf of the beeficiaries, as detailed i the terms ad coditios of the trust. Trust property With a protectio trust such as the oe we ll outlie i this guide, the trust property is a life isurace policy. 03
Protectio Why should you put your lifeisuracepolicyuder trust? Whe is a trust usuitable? There are a umber of reasos why it s ofte a good idea to put your life isurace policy uder trust: Your beeficiaries should receive the moey quickly. Oce we ve accepted the claim, we ca pay the moey from your policy directly to the survivig trustees, who ca pass it to the beeficiaries whe they eed it most. As the settlor, you ca ame the perso or people you wat to receive the moey from your policy. The trustees ca pay those people as soo as they receive the moey from us. As the settlor, you ll automatically become oe of the trustees, so you keep a elemet of cotrol over your life isurace policy. Usig our suitably worded trusts, your life isurace policy wo t be couted as part of your estate whe you die. This meas the trustees will be able to pay the beeficiaries without havig to pay iheritace tax o the moey from the policy. Not all trusts are IHT effective. HM Reveue & Customs (HMRC) treat the premiums you pay as gifts as far as iheritace tax is cocered, but they will ofte be exempt. This ca be a good way of usig the iheritace tax exemptios. A trust may ot always be the best optio for you. Whe you re cosiderig puttig your life isurace policy uder trust, you should also thik about these poits: You ca t place your life isurace policy uder trust if you ve assiged it to a leder (for example, your mortgage provider) as security for a loa. If you ame yourself as a potetial beeficiary, the policy will ot be outside your estate for iheritace tax as HMRC the cosider it to be a gift with reservatio of beefit. This is because you are also the settlor. This meas that the moey from your policy will be icluded i your estate for iheritace tax calculatios whe you die, eve if you have t received ay moey from it durig your lifetime. So you should ot ame yourself as a beeficiary of your protectio policy trust. Your policy wo t be treated as a gift with reservatio of beefit if you choose to receive ay payout from your life isurace policy for critical illess or mortgage paymet protectio. Gift with reservatio of beefit A gift which is ot fully give away, so that the perso gettig the gift does so with coditios attached or the perso makig the gift keeps back some beefit for themselves. 04
Trusts from Aviva We have more tha oe specime trust that you ca use with a protectio policy. The trusts cover most circumstaces, so there s likely to be oe that will meet your eeds. Aviva Discretioary Gift Trust (Protectio) This trust is very flexible. Your trustees ca choose from a wide rage of beeficiaries (such as your childre ad gradchildre). Eve childre or gradchildre bor after the trust is set up ca beefit. You ca also add to the rage of potetial beeficiaries (e.g. by addig your ieces or ephews), ay of whom could receive moey from the policy. This meas that if circumstaces chage, the trustees ca agree to give oe or more of the potetial beeficiaries a share of the moey from the policy. You should tell the trustees (ideally i writig) how you d like the policy proceeds divided amogst the beeficiaries, ad of course you ca chage this at ay time. Aviva Survivor Trust This trust is suitable for you if your policy covers two people (for joit life, first death). It s commo for couples to have a life isurace policy that covers both of them ad pays the survivig parter whe the other oe dies. However, this type of policy ca cause problems i these scearios: Both parters die at the same time, i a accidet for example If a couple covered by the same policy die at the same time, we ll pay the moey from the policy to the youger parter s persoal represetatives ad it will become part of their estate for iheritace tax. There s also likely to be a delay before the beeficiaries receive the moey ad they may also have to pay iheritace tax o it. The survivig parter dies very soo after their parter If a couple covered by the same policy die very close together, we ll pay the moey from the policy to the persoal represetatives of the secod of the two to die. This meas that the moey will be part of that perso s estate. Because of this, the beeficiaries may have to wait to receive the moey ad they may also have to pay iheritace tax o it. The Aviva Survivor Trust ca help i both of these situatios. If you put your joit life isurace policy uder this trust, the trustees ca pay the moey to the survivig husbad, wife or civil parter as log as they are still alive 31 days after the death of their parter. If the survivig parter dies withi 31 days of the other parter, the trustees will pay the moey from the policy to the couple s childre. They wo t have to pay ay iheritace tax o the moey as part of either parter s estate. 05
Protectio Tax ad trusts Aviva Married Wome s Property Act Trust This trust is most suitable for a idividual who takes out a life isurace policy o their life aloe ad wats to put it i trust for their spouse, civil parter ad/or childre. However, although this trust is amed after the Married Wome s Property Act, you do t have to be married or a woma to set up this trust. It s less flexible (because of the restrictio o who ca be a beeficiary) tha the Aviva Discretioary Gift Trust (Protectio), so you should oly really cosider usig it if you re certai that you wo t chage your mid i the future. You ca oly ame your spouse, civil parter ad/or childre as beeficiaries. For this trust, whe we say childre, we mea your biological or adopted childre. You ca t ame ay stepchildre (uless usig the Norther Irelad equivalet trust) or gradchildre as beeficiaries. This trust will also protect your life isurace policy from your creditors if you, as the settlor, are declared bakrupt. However, you should bear i mid that ifyouplacethepolicyudertrustiaeffortto defraud potetial creditors, they will be able to claim the premiums you ve paid for this policy. Also, your protectio policy will have o sigificat value (ad hece be of little iterest to creditors) whilst you are i good health. Here, we ll outlie the tax positio of trustees of a life isurace policy held i either the Aviva Discretioary Gift Trust (Protectio) or the Aviva Survivor Trust. Both trusts give the trustees the power to ivest moey. As the trusts oly hold life isurace policies, the trustees will oly be able to use this power after they have made a claim o the policy. If that happes, we recommedthatthetrusteesseeklegaladviceothe best way to ivest the moey if they re ot payig it straight out to the beeficiaries. A adviser would also be able to give the trustees more iformatio o the tax implicatios for ay ivestmet they recommed. The iformatio we ve give here is based o our uderstadig of the tax laws i place at the time of writig (November 2013). Please bear i mid that tax laws may chage. UK iheritace tax Settig up a trust If you put your life isurace policy ito either a Aviva Discretioary Gift Trust (Protectio) or a Aviva Survivor Trust, HMRC will treat it as a chargeable lifetime trasfer. Whe you set up the policy, you re likely to be i good health, so the value of the policy will be il. This meas that there will be o charge to iheritace tax. 06
For the two trusts we re talkig about, you ca place ay existig policy you have ito trust. If you do that ad the policy is aythig other tha a term assurace policy (e.g. if it s a whole of life policy), the value of the chargeable lifetime trasfer whe you create the trust will be the greater of: the ope market value of the policy whe the trust is created (if you re i good health, the surreder value will give you a good idea of this value) the total amout of the premiums paid up to the time you create the trust. For a term assurace policy, oly the ope market value couts. The surreder value of a term assurace policy is usually il, but it still ca have a ope market value. This would be the case if the perso covered by the policy is i poor health ad likely to die before the ed of the policy term. The premiums If you put your life isurace policy ito a trust ad ca o loger beefit from it, HMRC will treat the premiums you pay as gifts as far as iheritace tax is cocered. These premiums will ormally be exempt from iclusio i ay iheritace tax calculatio uder the ormal expediture from icome exemptio or the aual iheritace tax exemptio of 3,000. If your premiums are large ad ot fully covered by ay iheritace tax exemptios, HMRC will treat them as chargeable lifetime trasfers. The moey from the policy The trustees ca pay the moey from the policy to the beeficiaries without it formig part of your iheritace tax estate as log as you (the settlor) are ot amed as a beeficiary. Tax o chargeable lifetime trasfers ad the ogoig trust It s possible that, as the settlor, you may make a chargeable lifetime trasfer whe you set up a trust or pay the premiums for the policy uder trust. It s ulikely, though, as your trust will oly hold a life isurace policy. You may have to pay some iheritace tax if the total value of all your lifetime trasfers i ay seve year period is more tha the il rate bad (curretly 325,000). If this happes, you would pay iheritace tax o the amout above the bad at half the death rate. Because the tax you pay is also treated as a gift, you will effectively pay tax at 25% o the excess. The trustees may have to pay periodic iheritace tax charges o your trust at te-year itervals after you set it up. This will oly happe if the value of the trust is higher tha the il rate bad at that time. As your trust will oly hold a protectio policy, the value will be very small as log as you re i good health. This meas it s ulikely that there will be ay tax charge. If there is a charge, whe the trustees calculate the tax, they ll take ito accout ay chargeable lifetime trasfers you ve made i the seve years before you set up the trust. 07
Protectio You ll pay iheritace tax o 30% of the amout over the il rate bad at half the death rate (20%). This meas that you will effectively pay iheritace tax at 6%, but oly o the value i excess of the il rate bad. The trustees may have to pay exit charges whe they pay the moey from the policy to the beeficiaries. This will happe if trustees paid a iheritace tax charge at the last te year aiversary or at the start of the trust if that was less tha te years ago. Agai, this is ulikely to happe with a protectio policy trust. If you die withi seve years of makig a chargeable lifetime trasfer, the value of that trasfer will become chargeable to iheritace tax at the rate applyig o death (curretly 40%). Ay tax payable o death will be reduced by ay tax that was payable whe the trasfer was made. Neither the trustees or the beeficiaries will ormally have to pay iheritace tax o the moey from the policy as it is ot part of your estate. If you have a spouse or civil parter but take out a life isurace policy o your life oly, do t pay the premiums from a joit accout as this may affect the iheritace tax positio. If you ad your parter set up the life isurace policy ad trust together, you ca pay the premiums from a joit accout. However, you should t ame yourselves as beeficiaries because this will affect the iheritace tax positio. If you make chargeable lifetime trasfers of more tha 325,000 (the curret il rate bad) i the same tax year or i the seve years before settig up the trust, you should complete forms IHT100 ad IHT100a ad sed them to HMRC. The trustees should also complete IHT100 ad either IHT100c or IHT100d whe they report a exit or periodic charge. 08
The case of Joh Black Joh Black is married with two youg childre. O the advice of his fiacial adviser, he takes out a term assurace policy for 400,000 ad writes this uder a Discretioary Gift Trust (Protectio) for the beefit of his childre. As the death beefit from this policy wo t be part of his estate, it wo t be subject to iheritace tax. Also if Joh dies, we ca pay the moey from the policy to Joh s survivig trustees as soo as we accept the claim. We wo t eed to wait for probate or other grat of represetatio. The value of the policy is il whe Joh creates the trust as he is i good health. Because of this, there is o chargeable lifetime trasfer ad o eed to complete a IHT100 form. I this istace, Joh s premiums are exempt uder the ormal expediture exemptio ad ot treated as chargeable trasfers. As log as Joh is i good health at every te year aiversary, the policy will have little or o value. This meas there wo t be a periodic charge to iheritace tax. If Joh dies ad we pay the claim before the ext te year aiversary, there wo t be a exit charge (provided the trustees distribute the moey before the ext 10 year aiversary). The iheritace tax rules for trusts are complicated, so we ve oly give a short summary based o our curret uderstadig. If you wat to kow more, please seek legal advice or visit the HMRC website: www.hmrc.gov.uk. UK icome tax The trustees will oly have to pay icome tax o the moey from the life isurace policy if the cash-i value is more tha the total value of the premiums you have paid. This is ulikely to happe with a protectio policy, so the trustees do t usually have to pay icome tax. UK capital gais tax Trustees do t geerally have to pay capital gais tax o the moey from life isurace policies held i a trust. 09
Protectio Questios ad aswers 1. Who is the settlor? The perso or people who set up the trust. They should be 18 or over ad of soud mid. 2. Who ca be a trustee? You ca appoit ay adult who is of soud mid as a trustee. You ca also appoit a trust compay. There are a umber of thigs to bear i mid whe you appoit your trustees ad you should seek legal advice about this. With the protectio trusts, as the settlor, you automatically become a trustee. We recommed that you appoit at least oe other trustee. 3. Who has the power to chage the beeficiaries uder the trust? As the settlor, you ca choose who will beefit from the trust whe you set it up. You ca also chage the beeficiaries. Whe you die, ay survivig settlor ca chage the beeficiaries. Whe all the settlors have died, the trustees ca chage the beeficiaries util the trust eds. 4. Ca a husbad ad wife or civil parters each take out their ow trust arragemets? Yes, but we recommed that you seek legal advice first as it could remove ay iheritace tax advatage. 5. Ca a husbad ad wife or civil parters establish a trust joitly? Yes, you ca do this with the Aviva Discretioary Gift Trust (Protectio) or the Aviva Survivor Trust. The Aviva Married Wome s Property Act Trust is oly suitable for life isurace policies that oly cover oe perso. 6. Ca I use the trust with existig life isurace policies? Yes, you ca put a existig life isurace policy uder trust usig the Aviva Discretioary Gift Trust (Protectio) or the Aviva Survivor Trust. 10
Seek legal advice Chages to tax law Please do t take the iformatio i this booklet as advice. If you re thikig of puttig your life isurace policy uder trust, make sure you seek legal advice. Legal advice will be give o your ow circumstaces ad will tell you whether usig a trust would be the best thig for you to do. It s importat that you seek legal advice because: there are both tax ad legal cosequeces whe you set up a trust you ca t cacel a trust oce you set it up the trustees have a special duty to the beeficiaries ad will be persoally liable for ay loss the beeficiary may suffer if the trustees use their powers wrogly. We ve based all of our tax iformatio o our uderstadig of curret legislatio ad HM Reveue & Customs practice. Both of these could chage i future, which may lead to you payig tax. We ve bee as accurate as we ca, but either we or our represetatives ca accept resposibility for loss you or ayoe else may suffer if you act or do t act based o ay iformatio we ve give. 11
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