The owner of a life assurance contract is the person effecting the policy, and is known as the policyholder or assured.
The proceeds of the policy will be payable on the death or survival of the life assured. In many cases the policyholder and the life assured are the same. However, subject to there being valid insurable interest, someone may effect a policy on the ""life of another"", with the benefits payable to the policyholder on the death or survival of the life assured.

There may be situations where the policyholder wishes to arrange for the benefits of the policy to be paid to someone other than himself (ie spouse and children).

In the event of a claim arising it is clearly important that the policy proceeds are available for the individual or individuals who require them as soon as possible.

When someone dies, the normal procedure would be for the executors to administer the estate and then apply for a grant of probate, or confirmation of estate in Scotland. Until probate is granted, which could be anything from 3 months to 3 years, the assets of the estate are effectively frozen and are not available to beneficiaries.

Hence a widow or intended beneficiaries may not receive any income from a life policy set up for that very purpose until probate is granted. This problem can be overcome in the following ways:

• Assignments
• Nominations
• Trusts

Assignments

An assignment is a transfer of ownership from one person to another.

The original owner of the property or right that is being assigned is known as the assignor. The person to whom the ownership is transferred is known as the assignee.

There are two types of assignment, an absolute assignment where ownership is transferred definitely and finally, and an assignment by way of a mortgage or charge where ownership reverts to the assignor once the loan is repaid.

If a protection policy is assigned absolutely, all the benefits payable under the policy will be paid to the assignee. If the assignee dies before any sum assured becomes payable, the policy proceeds would be paid to the assignee's executors, administrators or assigns.

Assigning a Life Policy

The assignment will be effected by completing a formal deed. For assignments by mortgage the deed will be drawn up by a solicitor. Absolute assignments may be drawn up by a solicitor or by using forms available from the life office.

The assignee must notify the life office of the assignment and may request an acknowledgment of the notice of assignment. An assignee cannot claim the proceeds of the policy until notice of assignment has been served.

The Benefits of Assigning a Life Policy

Assignments may be made for a variety of reasons including:

• sale or exchange
• gift or voluntary transfer
• transfer to trustees or beneficiaries under the terms of a trust
• transfer in connection with a mortgage with reassignment on repayment

A properly executed assignment will ensure that the assignee has a valid claim to the policy proceeds on maturity or death. During the term of the policy the assignee must be notified if premiums are not paid when due.

However, it must be remembered that an absolute assignment will transfer ownership (and therefore control) of the policy from the original policyholder, who will not be able to revoke or alter the assignment at a later date.

Nominations

Under Section 66 of the Friendly Societies Act 1974, any member of a Friendly Society has the right to nominate the person to whom the death benefits, up to the current limit of £5,000, shall be paid.

The member making the nomination is known as the nominator. The person who will receive the death benefit is known as the nominee.

A nomination does not transfer the ownership of the policy or give the nominee any interest in the policy during the lifetime of the nominator and may be revoked by the nominator at any time.

How a Nomination is Effected

The nominator must be over age 16 at the time the nomination is effected. The nomination must be in writing, signed by the nominator, and delivered or sent to the head office of the Friendly Society during the lifetime of the nominator.

The nominee may not be an employee of the Friendly Society unless he or she is the spouse, parent, child, brother or sister, nephew or niece of the nominator.

A nomination may be revoked by the nominator at any time, without the knowledge or consent of the nominee. To revoke a nomination the nominator can either execute and register a new nomination or complete a formal revocation document.

A nomination will automatically be revoked by the death of the nominee or the subsequent marriage of the nominator. However if the nominator makes a will after nominating someone to receive the death benefits of his policy this in itself does not revoke the nomination.

The Benefits of Making a Nomination

By nominating someone to receive up to £5,000 of the death benefit, the nominator is able to keep control of his policy and at the same time ensure that at least part of the benefits will pass to his chosen beneficiary(ies) on his death.

If his circumstances change he may revoke or alter the nomination at any time. For endowment contracts he can have the peace of mind of knowing that the nomination will operate in the event of his death before maturity but that otherwise when the policy matures the benefits are payable directly to him and not to the nominee.

The only drawback is the restriction of £5,000, and if this limit is increased in the future a new nomination would need to be completed if the nominator wishes to take advantage of the higher limit.

Trusts

There are many and various types of trust available. Some trusts can be highly complicated but, in many cases, the use of a simple trust can often help an individual’s beneficiaries and mitigate tax liabilities.

What is a Trust ?

The legal definition of a trust is an ""equitable obligation binding the trustee(s) to deal with the property over which he has control (called the trust property) for the benefit of certain persons (called beneficiaries)"".

Why Create a Trust ?

There are many reasons for creating a trust, but the main ones are as follows:

• To give away the value of the trust property whilst keeping control so that proceeds are not misused or wasted
• To protect the trust property against the settlor's creditors although if the trust is created in an attempt to defraud creditors, the courts are likely to overturn it
• To reduce the IHT liability by ensuring the trust fund forms no part of the estate
• To control the time when beneficiaries will receive entitlement to a share in the trust fund

Creating a Trust

A trust is normally created in one of two ways, by a will or a trust deed.

A trust for a life policy is normally established through the use of standard forms provided by the insurer.

A trust uses certain legal terminology, since it is a legal document. Some of the more commonly used terms are outlined here.

Benefits of Placing a Life Policy Under Trust

There are numerous reasons for placing a life policy under trust for a client, but here are the main ones:

• To reduce the delay when settling a claim on the life assured's death since this will not be dependent upon the sometimes lengthy probate process.
• To reduce the IHT liability by ensuring the proceeds of the policy form no part of the client's estate.

The Duties of a Trustee

When a trust is created, the legal ownership of the trust property passes from the settlor to the trustees. The duties of the trustees are:

• To manage the trust assets for the benefit of the beneficiaries..
• To hold the trust property in accordance with the trust provisions and the law relating to trusts.
• To deal with the trust property in accordance with the trust provisions and the law relating to trusts.
• To act independently at all times, and without influence from the settlor or other trustees
• Not to profit from the trust in any way
• Except in special circumstances, not to be paid for his/their services, although reimbursement for expenses incurred in executing the trust is permissible

The trustees may be individuals or companies. One of the advantages of using a corporate trustee, for example a bank trustee service or firm of solicitors, is that they are always available and willing to act on behalf of the trust.

What Type of Trust ?

As stated earlier there are many types of trust that can be created. They fall into two broad areas:

Statutory trusts, created in accordance with certain Acts of Parliament
Non-statutory trusts, which can be used when a statutory trust is not applicable

Statutory Trusts

Trusts under the terms of The Married Women's Property Act of 1882 are commonly used within the life assurance industry.

Since it is a statutory trust, the interest of a beneficiary is protected against the life assured's creditors in the case of bankruptcy provided that the trust has not been established to deliberately defraud creditors. This means that a wife can effect a policy on her own benefit, the benefit of her husband and/or children or any of them; or she may effect a policy on her husband's life for her own benefit. The husband may effect a policy on his own life for the benefit of his wife and/or children.

It should be noted that only single life policies are eligible for inclusion under M.W.P.A. trusts.

A trust automatically obtains the benefit of the M.W.P.A. if the conditions set down are met. In other words, a basic absolute trust by husband or wife and children obtains protection.

Another common statutory trust is monies held for children (and spouse if life interest) under intestacy rules.

Non-Statutory Trusts

There are broadly three types of non-statutory trust: Interest in Possession, Discretionary and Accumulation and Maintenance.

Interest in Possession Trusts

There are trusts where an individual or individuals are entitled to receive any income arising from the trust. This right to receive income is known as having an "interest in possession". Often such an individual is called a "life tenant".

There are a variety of types of interest in possession trusts. A trust for "my son John for his life and after his death for my grandson Matthew" is an example of an interest in possession of trust. In this case John holds the interest in possession during his lifetime. After his death the interest in possession passes to Matthew. This type of trust is often called a "life interest" trust.

Two types of interest in possession trusts are commonly used by insurance companies. These are "Absolute" trusts and "Flexible" trusts.

Premiums

Premiums are regarded as gifts by the payer to the trust. Where regular premiums are paid these will normally be exempt from Inheritance Tax under the normal expenditure from income or £3,000 annual allowance. If the premium is not covered by either of these allowances it will be a Potentially Exempt Transfer to the extent that the policy increases in value.

The excess, if any, will be a chargeable transfer. If this will cause Inheritance Tax problems for the payer, premiums can be paid direct to the trustees who can pay the insurance company. In this case the whole of the premium will be a Potentially Exempt Transfer.

Discretionary Trusts

These trusts are ones in which no-one has a right to the income, so nobody is given an interest in possession. The trustees are given an identified class of potential beneficiaries for whom income will be accumulated for later benefit. The settlor would normally give clear guidance regarding distribution of income and capital.

Accumulation and Maintenance Trusts

This is a special form of discretionary trust which can be used to accumulate income to provide a capital sum for children or grandchildren. Although a form of discretionary trust the accumulation and maintenance trust is treated differently for Inheritance Tax purposes. The beneficiaries become absolutely entitled to trust income at the age of 18 although the trustees can decide to wait until the age of 25, but no later.

When To Use Trusts

As stated previously, it is normally advisable to consider using trusts whenever establishing a life policy. A life policy will normally be placed under trust using standard trust documentation available from the life company.

An absolute trust should be used when a beneficiary is a known individual and the contract is for that individual's benefit absolutely.

A MWPA trust cannot be used in the case of joint life policies, but can be used for the benefit of the individual herself, for the benefit of the spouse, for the benefit of the spouse and children.

A flexible trust should be used when flexibility is required concerning the beneficiary of the contract proceeds, the most common use of a trust.

Pension contracts cannot be placed under trust for another's benefit as the proceeds must be solely for the policyholder.

Personal Pension Term Assurance and the return of the fund under a personal pension may be written under trust.

Existing Policies

If existing policies are not written under trust the individual must be aware of the potential tax traps of now writing them under trust.

If an existing contract is assigned to a trust, it will be viewed as a transfer for Inheritance Tax purposes, the current value of the contract being considered to be the amount of transfer.

Protection of Income & Capital ® 1995 Thomson Barrett Organisation. All rights reserved.