IHTM20555 - Split or retained interest trusts: regular premium arrangements

Split trusts connected to regular premium life assurance policies are most commonly encountered in connection with term assurance policies (IHTM20102). In addition to providing for a payment to be made on the death of the life assured (IHTM20081) some policies include other benefits, including critical illness or terminal illness benefits. Depending on the policy terms these benefits become payable if the life assured is diagnosed with a critical or terminal illness.

Usually where a policy provides both death benefits and critical or terminal illness benefits, the policy will pay out on only one claim. So if, for example, the policy pays out on a terminal illness claim there would be no further sum payable on the subsequent death of the life assured.

Whilst it is common for death benefits under a life assurance policy to be held in trust so that they do not form part of the life assured’s estate, critical or terminal illness benefits are usually retained by the life assured so they can receive those benefits during their lifetime.

Split trusts allow the alternative benefits payable under a life policy to be held for different beneficiaries. Most commonly this would involve the death benefits being held for the settlor’s chosen beneficiaries and the critical or terminal illness benefits being retained for the settlor.

The split trust will normally clearly carve out the rights which the settlor retains from the rights which are given away, meaning that split trusts will not result in a gift with reservation (IHTM14301).