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Putting Your Life Insurance in Trust

Last updated 28th October 2021

5 min read

Putting your life insurance in trust helps to ensure that your loved ones receive as much benefit as possible from your policy. By writing your life insurance policy as part of a trust, you’re afforded greater control over the way your beneficiaries receive the money.

This guide explains what you need to know about putting your life insurance in trust. Starting with the fundamentals of trusts, it goes on to outline 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 enables you to transfer money and assets to your friends, relatives or anyone you name as a beneficiary in the event of your death. A trust deed is created, outlining who will oversee the assets (the trustees) and who will receive them (the beneficiaries), as well as the terms of the trust.

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. In most cases, the terms of a trust will state that this is to occur when the owner of the trust dies – however, 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 form of 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 is handed over to the named trustees. They then become responsible for ensuring that the beneficiaries receive their share of the benefit from the life insurance on the date specified in the terms of the trust.

All forms of life insurance can be written in trust, including our Guaranteed Over 50 Plan. This type of over 50s life insurance policy offers automatic acceptance and guarantees to pay out in the event of your death (up to a maximum of £18,000 depending on your policy). If you put your Guaranteed Over 50 Plan in a trust, your trustees will ensure that the payout passes to your beneficiaries on the date you have specified.

The benefits of putting life insurance in trust

The main benefit of putting your life insurance in trust is that assets placed in a trust are not considered part of your estate for Inheritance Tax purposes. As such, a trust can be used to ensure that your loved ones receive all of the money from your policy rather than the potential of paying tax on part of it. This is the main reason that people choose to write their life insurance policy in trust.

Typically, a life insurance payout is 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 (the allowance increases to £500,000 for children, step-children, and grandchildren).

As a life insurance policy written in trust is excluded from your estate, it can help to reduce the overall value of your taxable assets and therefore the amount of Inheritance Tax your loved ones have to pay. Visit the Government’s guide to trusts and taxes to learn more.

Putting your life insurance in trust can offer several other benefits, including:

  • A faster payout for your loved ones – the transfer of trust assets is handled separately from the distribution of your estate, so there’s no need to wait for probate and the trustees can give the beneficiaries their share of the payout more speedily.
  • Greater control over when the money is distributed, with the option for your trustees to look after it until your beneficiaries reach a certain age.
  • Protection from any creditors, as 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:

  • First and foremost, putting life insurance in trust is an ‘irrevocable’ act. 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 have an ongoing obligation 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 the other parties, so you should choose people who you have faith in.
  • If a named beneficiary of the trust is changed to someone who isn’t your spouse or partner within seven years of your death, Inheritance Tax could still be charged.

How does putting life insurance in trust work?

Under normal circumstances, 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, which specifies the settlor (trust owner), trustees, beneficiaries, and terms.

After this point, the trustees technically own the policy and will take care of the trust deed (although you will continue to pay for the premiums). When you pass away, it is the trustees who 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. One of the myths surrounding life insurance in trust is that only relatives can be selected as beneficiaries – in reality, there are no limitations on who you choose to receive 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. The rules surrounding different trust types dictate the level of control that your trustees have over your assets and beneficiaries, so consider your options carefully. The sections below outline the two main types of trust: an Absolute Trust and a Discretionary Trust.

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 advantageous because the payout process is typically quick – as the beneficiaries are fixed, the money is also not likely to be subject to Inheritance Tax, which could otherwise be incurred if the named 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 into the trust.

Discretionary Trusts

By contrast, Discretionary Trusts give your trustees the discretion to make changes to your beneficiaries, the amount they are to receive, and when they receive it. You state your intentions about how the trust assets should be distributed in a letter of wishes, but it’s important to choose trustees who you can rely on 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 the flexibility to adapt if circumstances change after your death and before the money is paid out. Opting for 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 get a quote today.