A trust is a special feature that allows you to put aside money which can only be used by a certain person or people specified by you. When you have a life insurance policy, this policy can be put into a trust so that the beneficiaries of this policy can avail of the money through the trust
A number of people think that forming a trust can be a very complicated and expensive affair. This has led to only 6% of people in the UK deciding to form trusts. In fact, this notion is so wrong. Most insurance companies would offer you a trust completely free with your policy. What's more, you can talk with an independent financial adviser who will explain to you all the terms and conditions of a trust and guide you through setting up one which will be most beneficial to those who will be inheriting your assets.
Let us look at all the advantages of a trust. The main advantage of forming a trust is that money which goes through a trust becomes tax free. This means that your beneficiaries will not have to pay income tax or inheritance tax on the policy which they inherit. As UK laws go, any inheritance of over £325,000 is subject to a straight 40% tax. What use will an insurance cover be if you pay very high premiums and then almost half of the cover is taxed before the money gets to your family? This means people who will be leaving large estates and have painstakingly paid insurance premiums for years so that their families can have financial stability after their time, should make sure that they form trusts so that their families can gain full access to the insurance amounts. In the case of a person leaving money to a minor, a 'trustee' is appointed to look after the trust until the beneficiary reaches majority (18 years of age).
Another major advantage of forming a trust is that the money is left to the particular person specified. Since the trust is designed in this way, it means that the beneficiary can use the money the way they like without having to get a probate in order to use the money. Without a trust, the amounts are first paid to the legal estate. This means that you cannot directly pull out the money for a long time. It also means that if the deceased had any payments due, the money would first be paid to the creditors and only then would the remaining money be given to the beneficiary. In the case of a trust, the money will be disbursed as soon as you produce the death certificate of the person, which means you have quick access to the money and you can decide how it is to be used. This is very convenient since very often, huge amounts need to be paid as funeral costs and there may be other payments which the family needs to cover. The trust money will automatically help them at this time.
Are there any disadvantages to forming a trust? Not really. The only time a trust is advised against is when the insurance is for your house mortgage. Besides that, a trust is usually more beneficial to a person than any other form of leaving money to one's family or loved ones.