Trusts are a legal document where a person or a group of people are made responsible for an asset – in this case the Life Insurance pay-out.

What difference does this definition make?

I am simply doing a life insurance and the page I am browsing advised me to have a trust instead of no trust. What does that mean?

  • 1
    Where are you located? Local law may make a difference. – keshlam Nov 27 '15 at 21:28

Trusts are useful for a number of situations, country-centric or not.

  • If there are inheritance tax issues, a trust as owner of the insurance policy can help keep the insurance payout out of the deceased's estate.
  • If a beneficiary isn't capable of handling a large sum of money, a trust adds a layer of fiduciary responsibility. With that might come the risk of theft as with any third party.
  • 2
    The first bullet here is the normal reason that trusts are recommended as pretty much standard here in the UK for life insurance. @Ulkoma, if you have a life insurance policy on your own life and you die, that money goes into your estate to be distributed per the terms of your will, and is subject to inheritance tax. If the policy is set up in trust for someone else, it doesn't form part of your estate and so reduces your IHT liability (even potentially taking you under the IHT threshold). – Vicky Nov 28 '15 at 20:51

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