Understanding trusts. Your easy to follow guide

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1 Understanding trusts Your easy to follow guide

2 Understanding trusts: Your easy to follow guide Important note The information in this guide is based on our understanding of current legislation and HM Revenue & Customs practice, which is subject to change. We cannot accept responsibility for any liability that may arise as a result of any action taken or not taken as a result of this information. This guide does not constitute legal or tax advice. In addition, tax benefits depend on individual circumstances. It should be noted that trusts create binding legal commitments which in most cases result in a permanent change in ownership of your plan. To be fully aware of the impli cations of a trust, please seek advice from a qualified financial adviser. Scottish Provident s trusts are available from financial advisers or solicitors. We strongly recommend you get advice before you take any action. You should also speak with a financial adviser for full details of all the products mentioned in this document. At Scottish Provident, we want to keep the concept of trusts as simple as possible, so you are able to understand and appreciate the benefit of placing your protection plan in trust. What is a trust? A trust is a legal arrangement which ensures your assets are held and / or managed by nominated persons as a gift or benefit for persons of your choosing. Helpful tip We understand that some trust terminology can be complex, so we have included a useful glossary of terms at the back of this guide with the key words highlighted as you read through this guide. How is a trust created? A trust is usually created through a document known as a trust deed. This document allows a choice of people involved and sets out the terms of the trust. A trust can also be created through a will, where an individual can leave instructions that some or all of their estate is to be placed in trust. Who is involved in setting up a trust? As the person creating the trust, you are referred to as a donor or settlor which essentially means that you are the giver. If you take out a joint plan, then both you and the person you are creating the trust with are referred to as donors. The people who will manage the trust on your behalf are known as trustees.

3 With all of the trust deeds that Scottish Provident provide, the donor(s) are automatically trustees. But, there needs to be at least two trustees in place at all times. You should, therefore, choose at least one additional trustee to administer the trust with you. These people may need to deal with the trust following your death, so choose them carefully! Why is the donor a trustee? A donor does not have to be a trustee under trust law, but with a Scottish Provident trust deed the donor is automatically a trustee. This helps the donor(s) to retain a degree of control. Depending on the terms of the trust deed, they may have power to appoint new trustees, remove existing trustees and possibly change the beneficiaries of the trust. Who do I appoint as an additional trustee? A trustee should be someone you trust, for example; your partner or spouse, another family member, a close friend or your family solicitor. Trustees must be over the age of 18 (16 in Scotland), mentally able and not bankrupt. Trustees will have to sign the trust form to acknowledge their appointment and responsibilities. By accepting their appointment, trustees agree to carry out certain obligations and duties. Helpful tip With the exception of the business trust, Scottish Provident recommends that one of the trustees be independent; in other words someone who will not benefit from the trust (i.e. not a beneficiary ) and not the person who has created the trust. What does a trustee do? Once the plan has paid out, the trustees will have to decide whether it is appropriate to pay the proceeds of the trust to the chosen beneficiaries or to keep the funds inside the trust for investment purposes. If the trustees decide to keep the funds in trust, then they may delegate the powers of investment and management to somebody else. This means they can ask someone else to act on their behalf to invest the assets from the trust. Trustees must keep records of their actions, as they may need to prove they are managing the trust in an appropriate manner. For example, records must be kept of any changes made to the investments in the trust fund and any money paid or loaned to a beneficiary. It is also recommended that proof be kept of any professional investment advice received.

4 Understanding trusts: Your easy to follow guide Trusts that can adapt to suit your needs Can I change my trustees? Yes, you can change your trustees with all the trust deeds that Scottish Provident provides. Standard paperwork for this process can be provided, which will require signatures from all the trustees. Helpful tip One of the most common reasons for taking out life cover is to provide for your family when you die. By writing the plan in trust you can make sure that the proceeds of the plan are paid without probate delay. Can I change my beneficiaries? Yes you can, but only if the trust is discretionary. All the Scottish Provident trusts are available as discretionary trusts. If a discretionary trust is chosen, you should be aware that the trustees can appoint benefits to anyone named as a discretionary beneficiary in the trust. The trustees have a power of appointment, which means they can allocate funds to anyone who falls within the definition of a discretionary beneficiary such as your children or grandchildren. You can provide a letter of wishes to your trustees indicating which beneficiaries you wish to benefit from the trust. The trustees can be guided by a letter of wishes but are not bound to follow it. You can add to your list of discretionary beneficiaries when you set up the trust or at a later date if you would prefer, by writing to the trustees. Partners are not included in the list of discretionary beneficiaries. If you have a partner that you are not legally married to or have entered into a civil partnership with (civil partnership being a form of legal union), your partner can only receive benefits from the trust if you nominate them in writing to the trustees when setting up the trust, or at a later date. Once the trust has been completed beneficiaries cannot be removed from the list of discretionary beneficiaries. A letter of wishes can be used to provide guidance to the trustees when deciding to make any payment. Tax planning Trusts can also be used for inheritance tax (IHT) planning, as IHT can be reduced or avoided by using an appropriate trust. Currently IHT is payable at a rate of 40% on estates valued over 325,000 (although married couples or those couples within a recognised civil partnership may have a combined estate on second death of up to 650,000, assuming the surviving spouse dies in the current tax year, before an IHT liability will arise). Any payment made through a life assurance plan into your estate could take you over the IHT threshold if it is not written into an appropriate trust. As well as avoiding IHT, you can use trusts to make sure your family has funds available to pay for any tax liability that cannot be avoided. This will stop them having to take out an expensive loan or even stop them having to sell the family home to pay any tax amount due.

5 Which trust is right for you? What sort of protection plans can be put under trust? Generally, all Scottish Provident plans can be put into trust, although it may not always be appropriate to do so. For example, a plan written purely to repay a mortgage would not be written in trust if it was to be assigned to the lender. The right trust to use will depend on the type of plan, the reason you are taking it out and who you want to benefit from it. Your financial adviser can explain which trust to use for your personal situation. Do I have to take out a new plan to put it under trust or can I use an existing one? You can put both new and existing personal protection plans under trust. However, you may want to review your plans to make sure they are still right for you. Your financial adviser can carry out a review of your plans and recommend appropriate trusts for them. Your financial adviser can also look at the tax implications of putting your plan into trust. How do I put a plan under trust? With help from your financial adviser, all you need to do is fill in the appropriate trust form. Alternatively, you can arrange for your own trust to be drafted to meet your own specific needs. For this you will need to contact a solicitor or trust professional who will charge for this service. In any case, if you are not sure whether the trust is suitable for your particular circumstances, we strongly recommend you get professional legal advice. Fast facts Trusts can: Allow your family to benefit from your protection plan instead of the tax man Allow you to choose who you want to benefit Allow you to change who should benefit Allow access to your benefits without delay. But they do not: Mean you have to give up control of your assets Have to be expensive or difficult to set up with help from your financial adviser.

6 Understanding trusts: Your easy to follow guide What trusts do we offer? Scottish Provident offers a range of trusts, as each one can be used for a variety of situations. You should talk to your financial adviser to find the one that suits your specific needs. The split trust The split trust is available for use with Self Assurance term plans, and Pegasus plans that do not include the cover buyback option. It is designed to ensure that any critical illness benefit, disability income benefit, additional covered conditions payment or unemployment benefit is held for your absolute benefit, but place any death benefit (including terminal illness benefit), critical illness or total permanent disability benefit if you fail to survive diagnosis by 30 days, into trust as a gift for your intended beneficiaries, outside of your estate upon death for IHT purposes. It is available as a discretionary or bare trust. The gift trust This is the basic type of trust for family protection or for IHT planning as it helps to avoid probate delays on death and ensures the proceeds are outside your estate on death for IHT purposes. As the holder of the plan, you can t be the beneficiary but you can add to the list of discretionary beneficiaries at any time and your trustees will have the flexibility to decide which of the discretionary beneficiaries payment is made to. It is available as a discretionary or bare trust. The probate trust The primary aim of this trust is to allow payment of the plan proceeds to the trustees without the need for probate. The trustees can then distribute funds to the beneficiaries. There is no IHT saving by using this trust. But, you will be the beneficiary of any critical illness or total permanent disability proceeds if you survive diagnosis by 30 days. Any benefit paid on death or diagnosis of a terminal illness will be held for the discretionary beneficiaries. The trustees will have the flexibility to decide which of the discretionary beneficiaries to make payment to. This is a discretionary trust. The business trust The business trust is specifically designed for business protection plans (partner, member and shareholder protection) being set up as an own life in trust arrangement. The business owner s plan can be written under trust, with the beneficiaries being the other partners, members or shareholders in the business. This ensures that the surviving co-owners have the necessary funds to buy a deceased or ill person s share in the business and do not end up with an unintended or undesirable business partner or shareholder, such as a surviving spouse, child or unwelcome third party. This is a discretionary trust.

7 The Relevant Life Policy (RLP) trust The RLP trust is specifically designed for business protection plans being set up to provide death in service benefit for employees. The plan is applied for by the business and must be written under trust from inception, with the beneficiaries being the employee covered and their family. This ensures that the benefit is paid to an individual as required by the legislation governing RLP s. The employee is a beneficiary so that if they cease to be employed by the business the plan can be assigned to them as a personal plan. This is a discretionary trust. Trusts for joint life plans There may be occasions where a joint life plan is appropriate. For this reason there are two trusts available that specifically allow the surviving donor to benefit. The gift trust (joint life, first event) This trust is similar to the gift trust, explained opposite. It is used for basic IHT planning. The difference however, is that this trust allows the surviving policyholder to receive the proceeds if they are still alive 30 days after the death or diagnosis of a terminal illness of the first life assured. It would usually only be used with plans payable on a death or terminal illness, as the trust does not allow the donors to receive any critical illness benefit. It is available as a discretionary or bare trust. The split trust (joint life, first event) This trust follows the same principle as the gift trust (joint life, first event) that is explained above. The only difference is that this trust is designed for jointly owned plans where the donors would want to receive any critical illness benefits. It is available as a discretionary or bare trust. Getting the money when it is needed the most If you have an asset that has not been placed under trust, then the people you have asked to deal with your estate following your death will need to get the appropriate grant of representation before they can deal with that asset. This process is known as probate, or confirmation in Scotland. Probate is the legal process of confirming who can deal with the estate of a person who has died before the assets of the estate can be distributed according to the terms of their will. If someone dies without leaving a will they are said to have died intestate, which will see their estate divided according to rules known as the laws of intestacy. This can be a long and drawn out process taking several months or more. In the meantime, your family could be suffering financial hardship.

8 Understanding trusts Trusts a glossary of terms Assets this is anything of value that the person owns such as money, investments or property. Beneficiaries are the people who can benefit from the trust. Discretionary a type of trust where the trustees can determine who benefits from the trust and how. This trust is therefore very flexible. Donor this is the person who is creating the trust. They could also be called the Settlor. Grant of representation is a legal document, which enables the person(s) named in the document to handle the assets and belongings of the person who has died. How can I find out more? For more information you should speak to your financial adviser. If you do not have a financial adviser, you may want to visit where you can view details of financial advisers in your area. This is a free service and your name will not be passed on as a result of your enquiry. Intestate when a person dies without leaving a will, the assets they have left behind are distributed by the laws of succession rather than by any instructions that the deceased may have provided. Probate is the legal process of validating or establishing the distribution of a person s assets once they have died. In Scotland, this process is known as confirmation. Trust this is a legal arrangement which ensures your assets are held and / or managed by nominated persons as a gift or benefit for persons of your choosing. Trust deed is a legal document setting out the rules of the trust, as well as listing the assets that will be subject to it and the people who will benefit. Trustees are the people who will manage the trust and its assets on behalf of the people who are to benefit from the trust. Scottish Provident is a division of the Royal London Group, which consists of The Royal London Mutual Insurance Society Limited and its subsidiaries. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number It provides life assurance and pensions and is a member of the Association of British Insurers and the Association of Financial Mutuals. Registered in England and Wales number Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority. The firm is on the Financial Services Register, registration number and introduces Royal London s customers to other insurance companies. Registered in England and Wales number Registered office for both companies: 55 Gracechurch Street, London, EC3V 0RL.SCPR5674 MAR15 LD