Life insurance and trusts

Putting life insurance in trust is a way of protecting the payout your loved ones could expect to claim if you were to die unexpectedly. A trust can separate your policy from the rest of your assets, protecting any potential payout from inheritance tax.

This guide explains what it means to hold life insurance in trust.

  • Life insurance in trust involves transferring legal control of your life insurance policy to a trustee or trustees of your choice. This means your life insurance payout won’t be considered part of your estate when you pass away. As a result, your beneficiaries might not have to pay as much inheritance tax, or any at all.

    If your policy is held in trust, the life insurance lump sum may also not require ‘probate’. That is the process of proving the validity of a will, and who has the authority to administer your estate when you die.

    A policy that has been placed in trust might also mean your loved ones will receive and can distribute funds faster too, following a successful claim. That’s because even simple estates can take as long as a year to settle after someone has died.

    What is a trust?

    Trusts are legal arrangements where you name one or more trustees to manage your assets. They’re entrusted to make sure all funds reach your beneficiaries when the time comes.

    While a trustee can also be a beneficiary, it’s worth making sure there’s no conflict of interest that might result in distress for your family in future. If you need to have a beneficiary as a trustee, you could consider naming at least one other trustee who isn’t a beneficiary.

  • There are different life insurance trusts you can select from:

    Absolute trust

    Absolute trusts are usually fixed. This means that once it’s set up, you can be limited or completely restricted from making changes to the beneficiaries and each party’s share of the trust.

    Flexible trust

    Flexible trusts make it possible to name numerous potential beneficiaries, but you can amend the list as things change. For example, this might include adding new grandchildren.

    Discretionary trust

    With a discretionary trust, you give your trustees more decision-making power. It can be up to trustee discretion to decide how much your beneficiaries get. However, you can still leave a letter expressing your wishes as a guide to your trustees.

    Survivor’s discretionary trust

    A survivor’s discretionary trust is a form of joint life insurance in trust. Like a normal joint life insurance policy, it pays out to the surviving policy owner. However, with a joint trust, the surviving policy holder would be entitled to inherit your policy before any of your beneficiaries. If both policy holders die within 30 days of each other, the pay-out will go to any other named beneficiaries.

    Split trust

    With a split trust, if you have life insurance with critical illness cover, you can hold both in trust and then split it. Unlike life insurance, critical illness cover may pay out when you’re diagnosed with a critical illness listed in your policy. This type of trust allows you to benefit from critical illness payments now, while the life insurance policy stays in place for your loved ones.

  • There are several benefits to putting life insurance in trust.

    • Express your wishes. You get to define who gets what in the event of your death, and who you would like to manage the process.
    • Protections against inheritance tax. Life insurance policies can count towards your estate. If the total value of your estate plus the life insurance lump sum is over the inheritance tax threshold, your loved ones may need to pay 40% tax on the excess. With life insurance in trust, your policy does not count towards your allowance meaning your beneficiaries could stand to receive and keep more money in the event of a successful claim.
    • Potentially faster access to funds. As life insurance written in a trust is exempt from inheritance tax, it could avoid going through probate. This may mean a faster payout for the people important to you, after they make a valid claim.
  • While there are benefits to putting a life insurance policy into trust, there are also things to consider.

    • It’s a full legal arrangement, which may not suit all. Putting life insurance in trust is a large commitment and some types of trusts don’t allow for any changes.
    • Harder to make changes once in trust. Once the policy is in trust, you can’t take it out of a trust, so consider things carefully before you come to a decision.
    • It may invalidate policy if changes are made incorrectly. If you feel like changes need to be made, speak to a legal expert to avoid invalidating your policy. This way, you won’t run the risk of your loved ones missing out on the benefits of a policy written in trust.
  • When selecting who can be a trust beneficiary, you have complete control. Whether it’s friends or family, or even an organisation. You can have multiple beneficiaries, helping you to support everyone you love in life.

    Beneficiaries could be:

    • Your partner or spouse. 
    • Children, grandchildren or stepchildren.
    • Wider family members like cousins, aunts or uncles.
    • Friends.
    • An organisation or charity.
Frequently asked questions

Frequently asked questions

  • If you don’t have life insurance yet, you may be able to put your policy in trust when taking out a policy. If you have a current life insurance policy you want to put in trust, you should speak to a financial adviser or a solicitor. Bear in mind, you may need to pay for this service.

  • Yes, you might like to consider a joint survivor’s discretionary trust. With this type of policy, the surviving policy holder will receive a payout before any other beneficiaries.

  • If setting up a new life insurance policy and putting it straight into a trust, there shouldn’t be a cost.

    If you’ve got an existing policy, you should speak to a financial adviser or a solicitor first.

    In either case, if you use a solicitor or financial adviser, there could be additional fees to pay.

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