Trust Arrangements for Protection

• Topic 01

  Trust Arrangements for Protection

  51 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A client asks whether placing their life policy in trust will cause them to lose control of the policy. How should the adviser respond?

   • A
     Once placed in trust, the policy becomes trust property and the settlor loses their personal rights in the policy; however, they can guide the trustees through a letter of wishes and often remain a trustee themselves
     Correct answer
   • B
     Control is transferred entirely to HMRC, who must approve all changes to the policy once it is held in trust
   • C
     The settlor retains the right to change beneficiaries, increase the sum assured, and surrender the policy, but must inform the trustees of any changes
   • D
     The settlor retains control through the letter of wishes, which is legally binding on the trustees and overrides the trust deed
   Explanation

   This is a common client concern. The important answer is: yes, the settlor does lose their personal legal rights in the policy — they cannot surrender it for cash or change the terms unilaterally. However, in practice the impact is limited because: (1) the policy is for pure protection, so there is no surrender value to access; (2) the settlor often remains a trustee and can influence decisions; (3) they can write a letter of wishes to guide distribution. The IHT and probate benefits far outweigh the loss of personal control for most clients.

2. What is an absolute (bare) trust in the context of life assurance?

   • A
     A trust in which the settlor retains the right to reclaim the policy at any time before death
   • B
     A trust in which the beneficiaries are fixed and named at outset and cannot be changed; they have an unconditional right to the trust assets
     Correct answer
   • C
     A trust in which the trustees have complete discretion over who receives the proceeds and in what proportions
   • D
     A trust that automatically terminates if the beneficiary predeceases the life assured
   Explanation

   An absolute (bare) trust fixes the beneficiaries at the outset — they are named individuals with an unconditional right to the trust property. Once established, the beneficiaries cannot be changed, even if family circumstances change. This contrasts with a discretionary trust, where the trustees have discretion over who among a class of potential beneficiaries benefits, and in what amounts.

3. A policyholder has written their life policy in trust and appointed their spouse and a solicitor as trustees. The policyholder dies. What are the trustees' immediate obligations?

   • A
     To invest the policy proceeds in a low-risk fund and distribute only the investment income to the beneficiaries
   • B
     To claim the policy proceeds from the insurer by submitting the required evidence (death certificate, trust documents), then distribute the funds to the beneficiaries in accordance with the trust deed
     Correct answer
   • C
     To consult with HMRC to obtain clearance that no IHT is owed before distributing any proceeds
   • D
     To contact all potential beneficiaries named in the settlor's will and obtain their written consent to the distribution
   Explanation

   On the death of the settlor/life assured, the trustees must notify the insurer, submit the death certificate and trust documentation, and claim the policy proceeds. Once received, they distribute the funds to the beneficiaries according to the trust deed (and, for discretionary trusts, guided by the letter of wishes). Probate is not required. Trustees must act promptly and in the best interests of the beneficiaries under the Trustee Act 2000.