Putting life insurance in trust

A trust is a legal arrangement that allows you to leave money and things you own (your 'assets') to a person, people, or even a charity (the ‘beneficiaries’) when you die. A trust can be managed by family, friends or a solicitor (the ‘trustees’). All your assets put together form your ‘estate’.

Your life insurance is an asset and can be put into a trust in the same way as anything else.

Putting your life insurance into trust has a few different advantages:

Control – putting your life insurance in trust means you get to lay out who benefits from what you leave behind, and who you'd like to manage it.

Speed – probate is the process of dividing up your assets after you die and can take months to complete. If your life insurance is in trust, your loved ones don’t have to wait for probate for the policy to pay out. In most cases, your trustees just need your death certificate. However, they may have to apply for probate for other assets in the estate.

Tax – if your total estate, which includes your life insurance, is worth more than £325,000 (or £500,000 if left to your children or grandchildren) there may be a 40% inheritance tax bill to pay on the part over and above that amount. ^{Footnote [1]} Putting your life insurance in trust means it’s legally owned by your trustees and isn’t part of your estate. This means it doesn’t count towards that £325,000, and that means your loved ones get the full pay out. You may also benefit from the residence nil rate band, which can add up to £175,000 to your tax-free allowance when passing your main home to children or grandchildren.

Although there are benefits to setting up a trust, it might not be the best thing for you. It’s a legal arrangement and you should think carefully before signing up.

A trust may have legal and tax implications. So, remember that you’re handing over legal ownership of your life insurance policy to someone else, your trustee(s) and this can’t be reversed.

Before making any changes to your finances, or if you’re thinking about setting up a trust, you should get financial and legal help.

There are a few different types of trust, and the differences between them largely come down to how much flexibility there is to make changes. Which is right for you depends on the type of life insurance you have and who you’d like to benefit from a payout.

For example, a ‘flexible’ or ‘discretionary’ trust allows you to name a number of people as potential beneficiaries, and add to that list as things change, e.g. as grandchildren are born after the trust is set up.

By contrast, with an ‘absolute’ or ‘bare’ trust, beneficiaries can’t be changed.

A ‘survivor trust’ might fit the bill if you have a joint life insurance policy. In this case, the trustees pay any money to your surviving partner (as long as they’re still alive 31 days after your death), or your chosen beneficiaries if you both die within 31 days of one another.

Your first step is to make sure it’s the right thing for you. Remember to get independent financial and legal advice before going ahead.

If you’re thinking of doing it when you buy your life insurance, you should have an idea of who you’d want as your trustees before you start. If you want to put an existing policy in trust, you might need a financial adviser or a solicitor’s help and bear in mind that might cost.