One thing almost guaranteed to make most advisers’ eyes glaze over is talk of trusts – or so it seems, when talking about protection products. The perception is that trusts are largely unnecessary, extremely complicated and associated with endless forms full of long legal words. But this is not entirely true these days. Yes, trusts are complex, but the reality is that thanks to work by providers on improving their trust forms and producing clear and simple guides to completion, setting things up under trust needn’t be complicated at all. So why not use them when it comes to mortgage protection?
Things are changing
Traditionally most have argued that trusts have no place in the mortgage protection discussion. In the past, when life cover was assigned to the lender, trusts weren’t needed. But that has changed and trusts are now much more relevant than ever before.
Before your eyes glaze over, think of this – if you position a trust as a valuable add-on to the product you are recommending, it makes everything you are offering more attractive. What client wouldn’t be interested in a product that:
- Is free;
- Could save your client 40p in the pound;
- Could save you and your client months of legal wrangling.
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Right time
So, without getting too complicated, let’s look at what a trust actually is. Put simply, it’s a way of choosing who will receive the benefit of specified assets without giving them full and immediate control over them.
What do trusts do? Well firstly they make the proceeds available quickly, when they are needed most. If an asset is not under trust, the professionals who deal with the estate after a death will need to get a ‘Grant of Representation’ before they can distribute a specified asset. This is ‘probate’ in England and Wales, 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 his or her will. If someone dies without leaving a will they have died ‘intestate’. Their estate will be divided according to the ‘laws of intestacy’.
With or without a will, distributing assets that are not under trust can be a lengthy process and can take several months. In the meantime, your client’s family could be suffering financial hardship following their death. By placing assets under trust, the need for probate can be avoided and the trustees can deal with the trust property immediately, making sure the beneficiaries do not suffer financially after the client dies. So, by writing a life policy in trust, you can make sure the proceeds of the policy are paid to your client’s family without delay.
Tax safeguards
Finally trusts are often used for tax planning. Inheritance tax (IHT) can be due on even the simplest life assurance policy. But this can be avoided if you set the policy up under the appropriate trust. Currently, IHT is payable at a rate of 40 per cent on estates valued over £300,000. This means that you may have to pay IHT even on estates that are worth less than this once the value of any life assurance has been added. As well as avoiding IHT, you can use a trust and life assurance policy to make sure the family has funds available to pay any liability that cannot be avoided. This will stop them having to take an expensive loan out or even sell the family home to pay any tax that may be due after they die.
All this is why you should be putting a mortgage protection term assurance policy under trust. Now that fewer lenders require assignment, if the policy is put under trust it would not get caught up in probate and would therefore be available to pay off the outstanding mortgage immediately.
You may argue that from a tax perspective, if a policy is not written under trust, then the existing mortgage debt would cancel any IHT implications anyway. But this is not true. While the value of the policy may be cancelled out by the debt, the full value of the house is now in your client’s estate and potentially subject to IHT. And what if the life policy was worth more than the outstanding loan? This could happen with a repayment mortgage where the protection is not decreasing or if there was extra cover to provide an additional income for the family, for example. Besides, what about all the other benefits – speed and no legal wranglings, at no extra cost?
Scope for advisers
Some would argue quite convincingly that arranging a mortgage and an associated mortgage protection product already involves excessive amounts of paperwork, without having to add in extra advice and paperwork around trusts. But many providers really have made it quick and easy to set policies up under trust, and they’re there to answer any queries you might have. That means there’s certainly scope for mortgage advisers to invest a little extra time in order to simplify estate administration in the future. This can be while arranging the mortgage, or perhaps at a later date.
It makes your advice even more valuable and attractive to your client, and could potentially help grow your business in the future too.
