Putting your life insurance in trust
Last updated 31st October 2023
6 min read
Putting your life insurance in trust helps to ensure that your loved ones get as much benefit as possible from your policy. By writing your life insurance policy as part of a trust, it will not be subject to inheritance tax, and your loved ones may be able to access the payout more quickly.
This guide explains what you need to know about putting your life insurance in trust. Starting with the basics, what it means to write a life insurance policy in trust, the pros and cons, and how the process works.
What is a trust?
A trust is a legal framework that lets you transfer money and assets to your friends, relatives or anyone you name as a beneficiary in the event of your death.
When you put something in trust, a trust deed is created. This will outline:
- What the assets are and how they should be passed on
- Who the trustees are (the people who will oversee the assets and make sure they are passed on)
- Who the beneficiaries are (the people who will receive the assets)
The trustee or trustees can be a legal professional, a family member, or a friend. It is their responsibility to ensure that the beneficiaries receive the assets. Usually the terms of a trust will state that this is to happen when the owner of the trust dies – but you can also specify a date for the assets to be transferred, such as a beneficiary’s 18th or 21st birthday.
What does it mean to write a life insurance policy in trust?
Like any other asset, your life insurance policy can be included as part of a trust (this is known as writing your life insurance in trust). Control of the policy then goes to the named trustees. They are then responsible for ensuring that the beneficiaries receive their share of the benefit from the life insurance on the date specified in the trust deed.
All forms of life insurance can be written in trust, including our Guaranteed Over 50 Plan and our Guaranteed Inheritance Plan. These types of over 50s life insurance policy guarantee to pay out in the event of your death. If you put your plan in a trust, your trustees will ensure that the payout passes to your beneficiaries on the date you have set.
The benefits of putting life insurance in trust
The main benefit of putting your life insurance in trust is that it will not be considered part of your estate for Inheritance Tax(www.gov.uk opens in a new tab) purposes. So, a trust can be used to ensure that your loved ones receive all of the money from your policy rather than potentially paying tax on part of it. This is the main reason that people choose to write their life insurance policy in trust.
If not written in trust, a life insurance payout is usually included in the value of your estate. If your estate is worth over £325,000 when you die, those who inherit it will be taxed at 40% on the amount over this threshold (with some exceptions – see our complete guide to inheritance).
A life insurance policy written in trust is excluded from your estate, so it can help to reduce the overall value of your taxable assets and the amount of Inheritance Tax your loved ones have to pay. Visit the Government’s guide to trusts and taxes(www.gov.uk opens in a new tab) to learn more.
Putting your life insurance in trust can have a few other benefits, such as:
- A faster payout for your loved ones – Trust assets are handled separately from the distribution of your estate, so there’s no need to wait for probate before the trustees can give the beneficiaries their money.
- Greater control over when the money is distributed – You set the date for when your beneficiaries receive the money, with the option for your trustees to look after it until your beneficiaries reach a certain age.
- Protection from any creditors – A policy written in trust may not be accessible in the same way as assets included in the rest of your estate.
The disadvantages of writing life insurance in trust
There are, however, some disadvantages to writing your life insurance in trust:
- You cannot change your mind – Putting life insurance in trust is an ‘irrevocable’ act. This means you can’t change your mind and withdraw the policy from the trust at a later point, so you must be absolutely sure about the decision.
- You lose some control over your life insurance policy – By placing it in trust, you are essentially giving the policy away to your trustees to look after on behalf of your beneficiaries (although you will still have to pay the premiums). Whilst you will usually be one of the named trustees, any actions relating to the trust must be signed off by all the other parties.
- Inheritance tax may still be charged – If a named beneficiary of the trust is changed to someone who isn’t your spouse or partner within seven years of your death, the payout might not be exempt from Inheritance tax anymore.
How does putting life insurance in trust work?
Normally, the process begins when you take your policy out. Your provider will refer you to someone who can put your life insurance in trust. If you don’t already have a trust set up, then one will need to be created by writing a trust deed.
After this point, the trustees technically own the policy and will take care of the trust deed (although you will still pay the premiums). When you pass away, the trustees will use the deed to make the claim to your insurer before passing on the payout to your beneficiaries.
It may also be possible to transfer an existing life insurance policy into a trust with the help of a solicitor.
Who can be a beneficiary?
Anyone can be named as one of the beneficiaries of your trust. It is a myth that only relatives can be selected as beneficiaries of life insurance in trust – in reality, there are no rules on who you can choose to get the payout.
Common choices for trust beneficiaries include:
- Spouses or partners
- Children and other family members
- Friends
- Charities
Different types of trust
Deciding which type of trust to go for is an important step in the process. Different trust types give different levels of control to your trustees over your assets and beneficiaries, so consider your options carefully. Two main types of trust are Absolute Trusts and Discretionary Trusts.
Absolute Trusts
An Absolute Trust gives your trustees the least amount of control. In this type of trust, the beneficiaries are named in the initial trust deed and cannot be changed at a later date. It’s important to be completely sure about your decision as to who receives the money and how much they get if you go down this route.
Absolute Trusts can be useful because the payout process is usually quick – as the beneficiaries are fixed, and the money is not likely to be subject to Inheritance Tax (which might not be the case if the beneficiaries were changed within seven years of the trust owner’s death). However, if there are any new additions to the family, you won’t be able to add them to the trust.
Discretionary Trusts
Discretionary Trusts give your trustees the ability to make changes to your beneficiaries, the amount they are to receive, and when they receive it. You state how you would like the trust assets to be given out in a letter of wishes, but you will rely on your chosen trustees to carry out your wishes or make changes as they see fit.
One benefit of a Discretionary Trust is that it provides your trustees with flexibility in case circumstances change after your death and before the money is paid out. Choosing this type of trust also means that you don’t have to decide on the beneficiaries and trustees straight away. You can add and change the parties to the trust at any point. Just remember that Inheritance Tax may be charged on the payout if you die within seven years of changing a beneficiary.
Next steps
Whether you decide to put your life insurance in trust or not, we’re here to help you ensure that your loved ones are taken care of. Visit our complete guide to over 50s life insurance to learn more or find out more about our over 50s life insurance options below:
The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.