Putting life insurance in trust

One of the major benefits of putting life insurance in trust is that the money is protected from inheritance tax. 

Life insurance is designed to provide money to those you leave behind such as children or family members who are financially dependent on you. 

It provides peace of mind to you that they have the money available to carry on their lives and pay their bills. This could be extremely helpful at a stressful and emotional time. 

By putting life insurance in trust, this means it’s ring fenced against inheritance tax. But not many actually take advantage of this benefit.

Here we look at the benefits of putting life insurance in trust, how it works, why it might be right for you, and how to set it up.

What is a life insurance trust?

Putting a life insurance in trust is also known as ‘writing life insurance in trust’ or a policy ‘written in trust’. 

It doesn’t cost anything, apart from legal fees if you’re using a solicitor. All it means is that when you set up a life insurance policy, you make an arrangement to put the policy in what’s called a trust. 

If you put life insurance in trust, you decide who you want the money to go to if you die. This could be your family members or friends, and they are called the beneficiaries. 

The life insurance policy is then looked after by trustees, who could be family members, friends, or a solicitor, until it’s paid out to a beneficiary. These people meet to discuss the policy and must all agree before any action is taken. 

While it’s up to the trustees to decide where money is paid if you die, they must take your wishes into account when deciding this.

You don’t have to put a policy in trust. But if you do, it’s not included when the tax office calculates your inheritance tax bill when you die. 

The main advantages to putting life insurance in trust are: 

• Lowering your inheritance tax bill - Usually when you die, the money included in your life insurance policy is taken into account when the tax office calculates the value of your estate. This sum of money might then be taxed by 40% if it goes over the allowance (currently £325,000). But by putting life insurance in trust, this could help to sidestep inheritance tax. The money is paid directly to your beneficiaries and not counted as part of your estate.
• Payment could be quicker because you don’t need to wait for probate - Life insurance money, held within a trust, does not need to go through probate. This means the time it takes to make payments to your beneficiaries should be quicker than if you don’t have a policy in trust. Probate is a legal process and it confirms an executor’s authority to deal with your assets and possessions. Probate needs to be granted before any money is paid out and this is sometimes a lengthy process, especially if there’s no will in place. 
• More control over your beneficiaries - By setting up a trust, you specify exactly where you want your money to go and when. For example, you could appoint a trustee to look after money if a child is under the age of 18. You can also name the people you want to get the money, which is important if you’re not married or in a civil partnership.

How does life insurance written in trust work?

If you want to put your life insurance in trust, you need to decide what kind of trust is right for you. It could be worth speaking to a solicitor before making a decision.

The four different types of trust are:

• Absolute Trust: You name the beneficiaries and you can’t change these names in the future. 
• Discretionary Trust: You write a letter of wishes stating where you want your money to go if you die. Your trustees have a high level of discretion about paying your beneficiaries, using your letter as a guide. You’re also able to change and add beneficiaries to the policy. 
• Flexible Trust: This is similar to a discretionary trust. There can be more than one beneficiary and you choose how your money will be split between them when you die. There’s usually a default beneficiary and a discretionary beneficiary. Discretionary beneficiaries are set up by the trust, and if none are appointed everything goes to the default beneficiary. 
• Split trust: Let’s say your life insurance policy is linked to another policy, such as one for critical illness cover. A split trust means you can use the critical illness element if you need to and the life insurance remains within the trust.
• Survivor’s Discretionary Trust: This is a way for couples with a joint life insurance policy to put it in trust. The surviving partner gets money straight from the trust on the death of the first partner before other beneficiaries. If the surviving partner dies within 30 days, the trust can pay the other beneficiaries, children for example. 

The trustees of your trust legally own the policy and therefore it’s up to them to keep the document safe. They can ask a solicitor to do this, for a fee. If you were to die, it’s important the trustees have this document and any other relevant paperwork to hand. 

Who can be a beneficiary of a life insurance policy in trust?

It is up to the life insurance holder to decide who the beneficiaries will be. They’re usually family members or friends but it can be anyone you’d like your life insurance money to go to if you die. 

You could also choose a charity or an organisation to name as a beneficiary and there isn’t a limit to the number you can have. Unless you have an ‘absolute trust’, the beneficiaries can change as well. This can happen if you divorce and remarry, for example, or if you have children. 

What are the advantages of putting life insurance into a trust?

There are several main advantages to putting life insurance in trust.

• You can state exactly where you want your money to go
• You can avoid life insurance inheritance tax
• Probate doesn’t need to happen on the money from your policy
• It can be quicker for payouts to be made

What are the disadvantages of putting life insurance in trust?

It’s important to fully understand how putting life insurance into a trust works. For example, it can be hard to change this arrangement once you’ve  set it up. You also need to be aware of the rules around inheritance tax.

For example, if you move a policy into trust and die within seven years, inheritance tax may be due. If you need help setting it up, it’s a good idea to speak to a solicitor. 

How do I put a life insurance policy in trust?

When you take out a new life insurance policy you usually have the option by your insurer to put the policy in trust. You can do this straight away or you can do it at a later date by completing a life insurance trust form.

If you have a policy and want to put it into trust, you might need to speak to, and pay for, help from a solicitor for this to happen. 

Should cohabiting couples put life insurance in trust?

Married couples and those in a civil partnership are automatically given legal rights including those around death. When one dies, the other should automatically inherit their money and assets, even if a will isn’t in place. They can also share their inheritance tax allowance. 

This isn’t the case for those who live together - also called cohabiting couples. This is even though it’s common for couples to live together, and have families together, without being married or in a civil partnership.

These couples have no automatic claim over a life insurance policy not written in trust, or a partner’s estate if they’re not specifically mentioned in a will.

For these couples, putting a policy in trust means they can name the person they want their money to go to. They also avoid inheritance tax being due on this part of their money. 

Can I change my life insurance after it is written in trust?

When your life insurance policy is written in trust it technically is then owned by the trustees. This means it’s not straightforward - and sometimes not possible - to make changes to the life insurance policy after this point. You should be given information about this by your insurer when you put it into trust. Before you make a commitment, make sure you read all the terms and conditions and understand how changes can be made.

Life insurance in trust FAQs

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

The timeframe for a payout from a life insurance policy in trust depends on the situation of the death and how complicated the policy is. If there are lots of beneficiaries or there are complications around the death this could be a lengthy process. You should be given an indication of when the money will be paid out by a solicitor after the death.

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

If a trust has been set up for a child, they usually can’t access this money until they turn 18. However, the person who set up the trust can set a specific age, 21 for example, as the age they can access the money. Until they turn 18 a guardian should be appointed to manage the money, if this is what the policy holder wants. 

How long does a trust last?

Legally a trust can last 125 years, however you can determine how long you want it to last when you go through the process of putting life insurance in trust. It’s more common to keep it in trust while you need it, such as while you’re paying off a mortgage or have young children.