Writing life insurance in trust

Putting a life insurance policy in trust can help protect your pay-out from inheritance tax, so your loved ones receive more of the money - and faster too. Here’s what to consider.

Putting a life insurance policy in trust can help protect your pay-out from inheritance tax, so your loved ones receive more of the money - and faster too. Here’s what to consider.

Faith Archer
Life insurance expert
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Posted 9 DECEMBER 2019 Last Updated 20 JANUARY 2022

What’s a life insurance policy written in ‘trust’?

A trust is a simple legal arrangement that lets you leave the money from your life insurance to whoever you choose as beneficiaries – this could be your children, relatives, friends or even a charity.

Writing a life insurance policy in trust is also a way of keeping the pay-out separate from the rest of your estate after you die. Your estate is everything you own: all your property, money, investments and possessions.

If it’s worth more than £325,000, anything above that could be subject to 40% inheritance tax when you die. However, if you own your home and your total estate is valued at less than £2 million, your inheritance tax threshold could increase to £500,000, providing you leave your home to your children or grandchildren in your will.

Anything left to your surviving spouse after your death passes free from inheritance tax, including any unused inheritance tax allowances. This means a married couple or civil partners could potentially leave up to £1 million between them to their nearest and dearest, free from inheritance tax.

If your life insurance policy is ‘in trust’, its value won’t be counted as part of your estate, so your beneficiaries won’t be forced to give a cut to the taxman.

How does life insurance in trust work? 

Having your life insurance ‘written in trust’ is a fairly simple legal procedure that your solicitor or insurance provider can arrange for you. When you put something in trust, you’re basically handing over the management of the pay-out to trustees chosen by you. This means that if you die, they’re responsible for making sure the money from your policy goes to the people you intend it to go to (your beneficiaries).

You should think very carefully about choosing your trustees. You need at least two trustees who are over 18 with a sound financial history – for example, a reliable family member or close friend.

Trust deeds, which set out the terms of a trust, will need to be agreed and signed by all parties involved.

Once your life insurance is in trust, your chosen trustees will be in charge of it, not you – you’re effectively giving up ownership, so it will no longer be considered part of your estate.

What are the main types of life insurance trust?

The main types of life insurance trust are: 

  • Absolute or ‘bare’ trusts – tend to be fixed, meaning you can’t make many (and sometimes any) changes to the beneficiaries or their share of the trust once it’s set up. If you die while one of your beneficiaries is still a child, the trustees will manage their share until they turn 18, but your child can take control of their money after that.
  • Discretionary trusts – can be more flexible, but you hand over many more of the decisions to the trustees. When you’re setting up a discretionary trust, you don’t need to decide straight away who’ll benefit, what they’ll receive or when they’ll receive it. Also, you can usually add other trustees to a discretionary trust once it’s been set up. It’s then up to the trustees to use their discretion when deciding who gets what and how much.

    Unlike a bare trust, where a child who’s a beneficiary has the right to whip out their share when they reach 18, the trustees of a discretionary trust could choose to wait until the child is older before passing on money. You can, however, write a ‘letter of wishes’ that the trustees can use as a guide when distributing the pay-out between beneficiaries.
  • Flexible trusts – similar to discretionary trusts, but in this case you have ‘power of appointment’ and can name one or more beneficiaries. You can also choose how you want the pay-out to be split between beneficiaries.
  • Split trusts – if you have life insurance with critical illness cover, you can put it in trust, then split it. This means you can still benefit from any critical illness payments while alive, but can leave a life insurance pay-out for your beneficiaries after you die.
  • Survivor’s discretionary trust – a joint life insurance trust particularly suitable for non-married couples. If one of you dies, the surviving policy owner is entitled to inherit the pay-out before any other named beneficiaries. If you both die within 30 days of each other, the pay-out will go to the other beneficiaries in the same way as a discretionary trust.

Why should I consider putting my life insurance in trust?

If you don’t put your life insurance in trust, the pay-out could count towards the value of your estate. So, if the sum of all your worldly goods is worth more than the inheritance tax threshold, your beneficiaries could end up handing over a chunk to the taxman.

There’s a bunch of benefits to placing a life insurance policy in trust:

  • It won’t be included as part of your estate, so your beneficiaries shouldn’t need to pay inheritance tax on the pay-out and can pocket more of the proceeds.
  • You get to choose exactly who the money should go to, with the reassurance that the process will be in trusted hands.
  • It doesn’t usually cost you anything extra – your insurance provider will often help you set up the trust and many providers have templates on their websites that you can use.
  • Pay-outs can be quicker – any proceeds from the policy can be paid out without needing to wait for probate. Probate is the legal process of adding up and distributing your wealth and property after your death, and it can often take several months to complete.

You can also transfer some existing life insurance policies into trust, but speak to an independent legal advisor first.

What are the disadvantages of putting a life policy in trust?

One of the disadvantages of putting life insurance in trust is that it can be hard to make changes to a trust once it’s set up. Once you’ve put a policy in trust, it usually can’t be taken out of trust again. However, there are times when you can amend a trust, but it can be risky. There have been instances when people have unknowingly invalidated their life insurance, after making changes to the policy in trust. Again, speak to a legal expert if you have any doubts about writing life insurance in trust.

There could also be tax implications if you move a life insurance policy into trust. Inheritance tax could be charged if you change the person named as a beneficiary on a life policy held in trust, then die less than seven years later. Inheritance tax might typically be due if the new beneficiary isn’t a spouse or civil partner, although the amount charged will start decreasing if you live longer than three years after making the change.

Can a joint life policy be written in trust?

Joint life insurance covers two people’s lives, but pays out only once. Most commonly, this payment will be a lump sum that goes to the survivor if the first person dies while the policy is running. If this happens, the policy ends and the survivor is left without any life cover.

It’s possible to write a joint policy in trust, but this kind of policy isn’t usually taken out in this way. That’s because joint life insurance is often taken out by couples – and estates can typically be passed on to spouses or civil partners without being liable for inheritance tax anyway. A trust could be helpful, however, if you take out joint life insurance as an unmarried couple.

How does life insurance in trust work for cohabiting couples? 

Cohabiting couples don’t have the same legal rights as married couples or those in a civil partnership. This means that the surviving half of a cohabiting or unmarried couple won’t have an automatic legal claim to a life insurance policy if it’s not written in trust.

If you want to ensure your cohabiting partner is financially protected if you die, writing your insurance policy in trust could really help as you could name them as a beneficiary. That way, the proceeds go to them and not your legal estate.

What else should I consider when it comes to writing life insurance in trust?

There are other factors to take into account when it comes to putting a life insurance policy in trust. For more information, read our feature on how tax and life insurance works. If you’re still unclear about anything, it’s a good idea to speak to a specialist advisor.

Frequently asked questions

How long does it take to get the money from a life insurance in trust?

It could take as little as a couple of weeks after the death certificate has been produced for your beneficiaries to receive the money – unlike probate, which could take several months.

How old do you have to be to access money from a trust?

A beneficiary can be any age, even an unborn child, but they can’t usually receive the money from a trust until they’re at least 18 years old (16 in Scotland), unless certain circumstances apply.

What happens if a trustee wants to retire?

If a person you’ve chosen no longer wants to be a trustee, they can usually retire as long as there are at least two more trustees in place. If necessary, a new trustee can be selected to replace the one retiring. This is also the case if you want to remove a trustee in certain circumstances or if a trustee dies.

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