Putting life insurance in trust

What is life insurance in trust?

A trust is a legal arrangement that allows you to leave assets to your chosen beneficiaries. Placing your life insurance into a trust transfers legal ownership of your life insurance policy to your chosen trustees. These could be partners, friends, family members, professionals or a company.  

The asset ‘in trust’ – in this case, your life insurance policy – is managed by one or more chosen trustees until it pays out to the beneficiary or beneficiaries. This could be when you die or on a specified date – for example, when your child or grandchild turns 18. 

The person who sets up the trust is known as the ‘settlor’. They transfer legal ownership of the asset to the chosen trustees.  

The trustees are then bound by law to manage the trust according to the rules set out by the settlor. This means they must act in the best interest of the beneficiaries of the trust. This is known as their fiduciary duty. 

Why write your life insurance policy in trust? 

Writing your life insurance in trust means the proceeds from your policy aren’t counted as part of your estate when you die. As such, they won’t be subject to inheritance tax. 

Your estate is everything you own. This includes all of your:  

• Property 

• Money 

• Investments 

• Possessions 

• Proceeds of any life insurance policies. 

The total value of your estate upon your death will be less any debts you owe. If your total estate is worth more than the £325,000 tax-free threshold, anything above that could be subject to 40% inheritance tax when you die. 

If your life insurance is in trust, your chosen trustees will manage the policy and make sure all of the money goes to whoever you choose as beneficiaries.

Because the life insurance payout won’t have to go through probate, your beneficiaries should receive their money sooner. They also won’t have to worry about paying inheritance tax on it.  

Also, if there’s tax to pay, putting life insurance in trust to use the money to pay the tax bill can be particularly useful. Probate delays can mean tax bills (which have to be paid within six months of death) are due before probate is granted and the money from the estate is released.

Waiting times have started to reduce in 2025, but it’s something to bear in mind when deciding whether or not to opt for writing life insurance in trust. 

Learn more about probate and dealing with admin after death in our guide to executing a will.  

What are the main types of life insurance trust?

Absolute or ‘bare’ trusts 

These tend to be fixed, meaning you can’t make many (or 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 (or 16 in Scotland). But your child can take control of their money after that. 

Discretionary trusts 

These 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.  

You can also usually add other life insurance 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 take 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 payout between beneficiaries. 

Flexible trusts 

These are similar to discretionary trusts, but you’ll have to name at least one ‘default’ beneficiary. They’ll receive the full payout from the life insurance unless the trustees choose to allocate funds to one or more ‘discretionary’ beneficiaries. 

Split trusts 

If you have life insurance with critical illness cover, you can put it in trust and then split it. This means you can still benefit from any critical illness payments while alive and leave a life insurance payout for your beneficiaries after you die.

Survivor's discretionary trust

This is 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 payout before any other named beneficiaries.

If you both die within 30 days of each other, the payout will go to the other beneficiaries in the same way as a discretionary trust.

Is it worth putting my life insurance in trust?

This depends on your circumstances. It could be worthwhile if all your assets, investments and savings are worth more than the inheritance tax (IHT) threshold.  

If it looks likely that you’ll have to pay tax on your estate, then putting your life insurance in trust is one way to make sure all the proceeds go to your loved ones. 

Setting up a trust for your life insurance payout is also a good idea if you want your named beneficiaries to be: 

• Children 

• Grandchildren 

• Any other minors.  

Any beneficiary classed as a minor at the time of your death can’t receive the money until they’re at least 18. You can set a date for the trust to pay out.  

This could be when the beneficiary is 18 or 21, for example. But up to that date you’ll have to name a trustee to manage it on their behalf. 

What if I leave my estate to my spouse or civil partner? 

Your spouse or civil partner won’t need to pay inheritance tax on anything you leave to them. Any of your unused IHT tax-free threshold can be potentially transferred to your partner when you die.  

This means that if you leave everything to your surviving partner, they could potentially leave up to £650,000 tax-free to your loved ones.  

But if you have other beneficiaries, this will reduce the amount that can be transferred. See examples of how this works at GOV.UK. 

What happens if I leave everything to my children or grandchildren? 

You could also benefit from an increased tax-free threshold of up to £500,000 per person if you decide to leave your own home to your children or grandchildren. This only applies if your estate is worth less than £2 million. 

But, even if your legacy won’t cross the inheritance tax-free threshold, writing your life insurance policy in trust means that it won’t have to go through probate. This means your loved ones can get the money they need sooner to pay for things like funeral costs. 

For help planning your end-of-life finances, read our guide to inheritance. 

How to put life insurance in trust

Many insurance providers will offer the option to ‘write your insurance in trust’ when you take out a life insurance policy, normally at no extra cost.  

But before you set up a trust for life insurance, it’s worth getting legal advice to make sure the trust will work how you want it to. Once the agreement is made, it’s not easy to make changes. 

You can also put existing life insurance policies in trust. But it’s wise to get help from a solicitor or a financial advisor to avoid invalidating your insurance or creating any tax issues. 

Here’s how to put a life insurance policy in trust. 

Choose your life insurance trustees 

You’ll want to think carefully about this. You need at least two trustees who are over 18 with a sound financial history – for example, a reliable family member or close friend. 

Agree your trust deeds 

These set out the terms of life insurance trusts, and they 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 your life insurance, not you. You’re effectively giving up ownership, so it’ll no longer be considered part of your estate and you won’t have a say in what happens to it. 

What are the benefits of setting up a trust for life insurance?

• Quicker payouts – because there’s no need to wait for probate, any proceeds from the policy can be paid out faster. Probate is the legal process of adding up and distributing your wealth and property after your death, and it can take several months – or longer – to complete.  

• Your life insurance payout is protected from inheritance tax.  

• You have more choice over when your beneficiaries receive the money – for example, when they reach a specified age.

• Your payout is protected from being used to pay off any outstanding debts – so your beneficiaries stand to inherit more.

• It doesn’t usually cost you any extra – your insurance provider will often help you set up the trust and many providers have templates on their websites that you can use.

What are the disadvantages of putting life insurance in trust?

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. That said, 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 a policy in trust. So, it’s advisable to speak to a legal expert if you have any doubts about writing life insurance in trust. 

Your beneficiaries could still end up owing inheritance tax  

Moving a life insurance policy into trust could have an impact on inheritance tax. If you change the named beneficiary on a life policy held in trust, then die less than seven years later, they may end up being charged the inheritance tax you were trying to avoid.  

Typically, inheritance tax might be due if the new beneficiary isn’t a spouse or civil partner.  

Note that the amount charged decreases if you live longer than three years after making the change. This is known as ‘tapered relief’. So, for each year – between three and seven – that you live after moving your life policy into trust, the percentage reduction increases. 

Who can be a beneficiary of my life insurance?

Anyone can be a beneficiary of your life insurance. You have complete control over who you want your pay-out to go to.  

The only real rule is that you have to choose at least one beneficiary (and it can’t be your cat or dog).

Life insurance trustees can also be beneficiaries if you want. That’s provided they’re over 18 and have the mental capacity.  

You can also split your life insurance pay-out between as many beneficiaries as you like, and in whatever proportion you choose. For example, you could leave some to your partner and some to your children. 

If you name a minor as your beneficiary, for example your child or grandchild, you’ll need to set up your life insurance policy in trust. Or you can appoint a legal guardian to manage the death benefit for them until they turn 18 (or 16 in Scotland). 

It’s also a good idea to inform your chosen beneficiaries about the life insurance policy you’re taking out. That way, they’ll know they need to  make a claim when the time comes.

Can a joint life policy be written in trust?

It’s possible to write a joint life insurance policy in trust, but it’s not the norm. 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.  

A trust could be very helpful, however, if you take out joint life insurance as an unmarried couple. 

How does life insurance in trust work for cohabiting couples?

Unmarried couples aren’t exempt from inheritance tax, unlike married couples or those in a civil partnership.

So, writing your insurance policy in trust is a way to make sure your cohabiting partner is financially protected when you die. You’ll just need to name them as the beneficiary. 

Because writing your life insurance in trust means the payout won’t be counted as part of your estate, it won’t be subject to inheritance tax or the lengthy probate process. So, your partner should get all the financial protection you’ve set aside for them, and sooner. 

If your life insurance isn’t written in trust but you’ve named your cohabiting partner as a beneficiary of your policy, they should still receive their allocation of the payout. However, it will be counted as part of your estate, and they’ll have to wait until the probate has concluded to receive their money.  

Also, if the total value of your estate is worth more than £325,000, their share of the proceeds may also be subject to inheritance tax. 

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. So, it’s worth seeking help from a specialist advisor if you’re unsure.  

 For more information, you can also read our guide on how tax and life insurance works.

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