Putting 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
Insurance expert
11
minute read
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Last Updated 30 JANUARY 2023

What is life insurance in trust?

A trust transfers legal ownership of your life insurance policy to your chosen trustees. That means the proceeds from your life insurance won’t be counted as part of your estate when you die, so won’t be subject to inheritance tax.

Your estate is everything you own – all your property, money, investments and possessions, less any debts. It can also include the proceeds of any life insurance policies. 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 the money goes to whoever you choose as beneficiaries. This could be your children, relatives, friends or even a charity.

Because the pay-out won’t have to go through probate, your beneficiaries should receive their money sooner and they won’t have to worry about paying inheritance tax.

What is a trust?

A trust is a legal arrangement that allows you to leave assets like money, property or investments to family members, loved ones or whoever you choose as your beneficiaries.

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

Trustees can be friends, family members, or even professionals or companies. The person who sets up the trust, known as the ‘settlor’, effectively transfers legal ownership of the asset to their chosen trustees. The trustees are bound by law to manage the trust according to the rules set out by the settlor and to act in the best interest of the beneficiaries of the trust. This is known as their fiduciary duty.

Is it worth putting my life insurance in trust?

It could be 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 pay-out is also a good idea if you want to name children, grandchildren or other minors as your beneficiaries. Any beneficiary classed as a minor at the time of your death can’t receive the money until they’re 18. You can set a date for the trust to pay out, such as when the beneficiary is 18 or 21, but up to that date you'll have to name a trustee to manage it on their behalf.

Bear in mind that you don’t need to pay inheritance tax on anything you leave to your spouse or civil partner. 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 £625,000 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 on GOV.UK.

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, so long as your estate is worth less than £2 million.

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 and 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, as 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.

Think very carefully about choosing your life insurance 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 life insurance trusts, 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 and 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 (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 – 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 pay-out between beneficiaries.
  • Flexible trusts – similar to discretionary trusts, but you’ll have to name at least one ‘default’ beneficiary. They’ll receive the full pay-out 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, then split it. This means you can still benefit from any critical illness payments while alive and 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.

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

Putting your life insurance policy in trust can have several potential advantages.

  • 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. It can often take several months to complete, or longer if there’s any dispute.
  • Your life insurance pay-out is protected from inheritance tax.
  • You have more choice over when your beneficiaries receive the money: for example, they may need to reach a specified age.
  • Your pay-out is protected from being used to pay off any outstanding debts.
  • 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?

The main disadvantage 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. 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. 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.

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 life insurance 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). For example, you might choose:

  • Your spouse or partner
  • Your children, stepchildren or grandchildren
  • A close or distant relative
  • A friend or several close friends
  • A charity or organisation that’s dear to your heart.

Life insurance trustees can also be beneficiaries if you want. You can also split your life insurance pay-out between as many beneficiaries as you like, and in whatever proportion you choose – for example, leaving 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 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, so they’ll know they need to make a claim when it comes time.

Can a joint life policy be written in trust?

It’s possible to write a joint life insurance 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. 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 if you want to make sure your cohabiting partner is financially protected if you die, writing your insurance policy in trust and naming them as the beneficiary could be a good idea. It means the pay-out won’t counted as part of your estate, so won’t be subject to inheritance tax or the lengthy probate process. That means your partner will 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’ll still receive their allocation of the pay-out. 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. Their share of the proceeds may also be subject to inheritance tax if the total value of your estate exceeds the tax-free threshold of £325,000.

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 from a life insurance policy that’s held in trust – 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 life insurance 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. The person or people nominated to appoint trustees in the trust deed can do this. This is also the case if you want to remove a trustee in certain circumstances or if a trustee dies.

How long does a trust last?

In theory, a trust can last as long as 125 years – or indefinitely, if it’s a charitable trust. But in practice, a trust should last as long as you need it to, for example, until a child grows up.

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