CII R05 Trusts for Life Assurance — Questions and Answers
Question 1: What is the primary reason for writing a life assurance policy in trust?
- To reduce the monthly premium
- To ensure proceeds are paid outside the estate, avoiding probate and potential IHT (Correct answer)
- To increase the sum assured
- To allow the insurer to invest the premiums more effectively
Correct answer: To ensure proceeds are paid outside the estate, avoiding probate and potential IHT
Writing a life policy in trust means the proceeds are owned by the trust, not the deceased's estate. This avoids the delay of probate, potentially avoids inheritance tax, and allows for quicker payment to beneficiaries.
Question 2: In a life assurance trust, who is the 'settlor'?
- The person who receives the benefit
- The insurer who issues the policy
- The person who creates the trust by placing the policy into it (Correct answer)
- The solicitor who drafts the trust deed
Correct answer: The person who creates the trust by placing the policy into it
The settlor is the person who creates the trust — in a life assurance context, this is typically the policyholder who assigns the life policy into the trust.
Question 3: What is the role of the 'trustee' in a life assurance trust?
- To pay the premiums on the policy
- To legally hold the trust property and administer it for the benefit of the beneficiaries (Correct answer)
- To assess whether a claim is valid
- To underwrite the risk on behalf of the insurer
Correct answer: To legally hold the trust property and administer it for the benefit of the beneficiaries
Trustees are the legal owners of the trust assets. They hold and manage the policy and, on a valid claim, collect and distribute the proceeds to the beneficiaries in accordance with the trust deed.
Question 4: Under a discretionary trust, who determines how the life assurance proceeds are distributed among beneficiaries?
- The settlor, in their will
- The beneficiaries themselves by majority vote
- The trustees, using their discretion (Correct answer)
- HMRC, based on the beneficiaries' tax positions
Correct answer: The trustees, using their discretion
Under a discretionary trust, the trustees have discretion to decide how, when, and to whom the proceeds are paid from among the class of potential beneficiaries, giving maximum flexibility.
Question 5: What is a 'bare trust' in the context of life assurance?
- A trust with no named beneficiaries
- A trust where specific, named beneficiaries have an absolute and immediate right to the trust assets (Correct answer)
- A trust that can be revoked by the settlor at any time
- A trust used exclusively for pension purposes
Correct answer: A trust where specific, named beneficiaries have an absolute and immediate right to the trust assets
Under a bare trust, named beneficiaries have an absolute and indefeasible right to the trust assets. The trustees hold legal title only — the beneficial ownership belongs entirely to the named beneficiaries.
Question 6: Why might a policyholder choose a discretionary trust over a bare trust for their life assurance policy?
- Discretionary trusts have lower administration costs
- Discretionary trusts allow trustees to respond to future changes in family circumstances without needing to update the trust (Correct answer)
- Bare trusts are only available to companies
- Discretionary trusts attract lower inheritance tax rates
Correct answer: Discretionary trusts allow trustees to respond to future changes in family circumstances without needing to update the trust
A discretionary trust offers flexibility — trustees can change who benefits and in what proportion, accommodating future changes such as divorce, new children, or a beneficiary's financial difficulties. A bare trust locks in the beneficiaries at outset.
CII R05 Trusts for Life Assurance
What is the primary reason for writing a life assurance policy in trust?