22nd June 2023
What can possibly go wrong with a standard life insurance policy, and what can be done about it?
Perhaps the first generation of people who engaged with financial advisors, ‘en masse’, are now starting to reach the end of their lives, and either pass away or lose mental capacity. Frequently, whole of life insurance policies, often put into trust many decades ago are coming back into view as a result of those changes. What can go wrong?
- They may have lost touch with one or more of their trustees of the life insurance policy. This will cause problems in due course when the life policy comes to pay out as it will need to pay out to the trustees, and the trustees need to be verified. In the event of a deceased trustee (who is not retired by the date of their death), evidence as to the death will have to be secured by the surviving trustees. Often, if that was an accountant or solicitor from many years ago, the client and their family may have lost touch with their former advisors and may have simply no idea as to what has become of them. The former advisor may well have retired themselves, and may well have moved to a different part of the country or indeed a different part of the world to live out their retirement. Finding evidence that a person has or has not died can be difficult in such circumstances. It is for this reason, that it is probably worthwhile to review such life insurance trusts on a regular basis to make sure that you do know where all of the current trustees are.
- A trustee may have lost mental capacity. This may be more problematic, but then again it may not be. If the trustees making enquiries find out that there is perhaps a registered lasting power-of-attorney for property and financial affairs for one of their number, that does not necessarily mean to say that that Attorney cannot appreciate the position that they and the trust are in and they may be able to safely execute a deed retiring themselves as a trustee if they understand what that means, but their mental capacity to do so does need to be checked, particularly if that mental capacity is questionable.
Again, preventative action, taking steps to retire by deed, any trustee who has concerns as to their mental capacity to act, is always better done and be done ‘early’ than try to deal with the matter after the event.
For some trusts, there is a solution using that section at 36 of the Trustee Act 1925. This works as long as the trustee in question has no interest in possession in the trust fund.
With life insurance policy trusts that will by its very nature be the case – it will be discretionary for a class of beneficiaries generally including the spouse and children of the settlor whose life is insured and who is paying the ongoing premiums, but necessarily excluding the person who has the life insurance policy.
But if there are other types of trust out there, particularly property trusts where one of the trustees may also be the life tenant of the arrangement, this can cause significant difficulties at section 36(2) is not available, and an application to the Court of Protection for the court approved retirement of trustee and appointment of a new substitute trustee would be required.
- The life insurance provider has changed identity several times over the last 30 years and the Settlor and their family cannot trace what has happened. In this circumstance, it is generally advisable to seek assistance from a financial advisor and ask them to trace what has happened to the original life insurance provider as dealing with the back office of some of the specialist businesses who have acted to purchased the ‘back book of certain life insurance providers’ is frequently tricky and an advisor who has experience of dealing with such back office procedures is usually a good idea.
- Has the appropriateness of the beneficiaries under the original trust been checked recently? Are the beneficiaries a wide class of potential beneficiaries or are they a limited pool of fixed percentage beneficiaries? Are there any persons there or potentially there who ought not be there such as former life partners? It may well be that beneficiaries should be changed or updated. Whether or not the life assurance provider has a form to do this is a question to be raised with them. If they do not, then it is probable that a bespoke piece of drafting is required and it is important to note that the life insurance provider will not give clients approval as to whether the document as drafted and submitted works as intended or not. The provider quite legitimately will state that that remains the responsibility of the person who is sending the amending deed into the life insurance provider.
- What was the original intention behind the arrangement and does it still remain the case now? Frequently life insurance policies are taken out to cover specific life events, such as the death of someone who may have a mortgage outstanding at date of death so that there is a funding solution in place to pay off that mortgage leaving the family with an mortgage unencumbered property to live in. It may well be the case that the mortgage has been paid off during the lifetime of the person who set up and continues to pay for the life insurance. What is the intention behind the life insurance now, and is the arrangement still compatible with that? One which particular springs to mind is that frequently folk may wish to leave the benefit of a life insurance policy, but wish to do so in a matter which does not increase the size of the estate of the person who is left the benefit of the life insurance policy proceeds. These arrangements are generally termed ‘IOU’ arrangements so monies will pass from the life insurance provider to the recipient, AND the recipient will give an IOU back to the trust equivalent in value to the amount of funds they have received (but always being under the current nil rate band limit of £325,000.)
Unless the trust document has provisions which explicitly allow for such planning, there is a view that the trustees cannot engage in such planning as it is outside of their powers as trustees.
If I am a trustee and I agreed to lend on a 0% return basis, a sum of £200,000 to Beneficiary D, when there are potential Beneficiaries A to E, am I, as a trustee, not potentially ignoring the claims of Beneficiaries A B, C, and E to the fund by preferring to meet solely Beneficiary D’s wishes? Am I acting as a reasonable trustee in such circumstances? Should this be a risk that I am looking to take as a trustee?
All of those issues can be avoided if there is the ability within the trust deed to do that, and that typically means a bespoke drafted trust deed rather than a standard form one provided by a life insurance provider.
But all of the issues highlighted above still remain live even with a bespoke drafted Trust Deed. As with all trust arrangements, a trust is a complex legal creation and is not a one size fits all solution. Nor is it a ‘fire and forget solution’ as all trusts need a degree of ongoing management and compliance work on them, and it is storing up problems for oneself not to deal with such matters as they arise.
For more information contact our Private Client teams in Tunbridge Wells, Cranbrook, and East Grinstead on 01892 510 222.