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A split trust effectively combines two separate trusts in one.
A split trust does exactly what it says - it splits out the different types of cover within a single policy.
It allows a settlor to retain the benefits of an insurance policy pay out under certain specific conditions.
Split trusts are common in the case of life and critical illness policies.
They can be established so that if the policyholder, who is also the settlor, dies, the life insurance pay out is distributed via their trust.
However, if they suffer a critical illness and live, then they will retain the benefit from the critical illness policy.
The first trust would contain the terminal illness or death benefits held by the trustees for beneficiaries other than the settlor. An exception to this rule is if the policy is a joint life, first death policy, where a joint settlor may benefit from the gifted benefits if the joint settlors elected for the survivorship option to apply when the trust was established, and the surviving settlor survives by 30 days following the first death.
These benefits are known as the gifted benefits.
The second trust would deal with any income protection benefits and any benefits paid in the event of critical illness or total permanent disability. These would be held for the absolute benefit of the settlor.
These benefits are known as retained benefits.
The settlor can choose to have the retained (critical illness) benefits treated as gifted benefits when the trust is set up, but in so doing they give up all rights of access to these benefits in the future.
Once you put something into trust it's owned by the trustees. So if you want to keep some control over what happens to the contents of the trust, you should appoint yourself as a trustee.
For example, if you put a life protection policy into trust, and you want to increase the cover later on, this can only be done with agreement from the trustees.
It depends on whether your gift is exempt or not.
Premiums you pay for a life and critical illness insurance plan held in trust will usually be exempt, because the premiums are paid from your normal income.
Exempt gifts aren’t subject to inheritance tax (IHT).
Putting an existing policy into trust may not be exempt, but the value of the policy will be minimal (unless you are critically ill or terminally ill at the time).
To make sure you understand how IHT will apply to the gift, you should get legal advice before you set up a split trust.
A Split Trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis.
The case for using trusts in general also needs careful consideration on an individualised basis.
If you already have a trust structure in place and would like a second opinion - or, if you are wondering whether the utilisation of a trust could be of benefit in your personal circumstances contact our trust experts for comprehensive, highly qualified advice.