Father and son eating toast

Trusts

Leave your loved ones more

This content is designed to help you understand the benefits of putting your policy into trust and makes it easy to get your trust set up.

What is a trust and how does it work?

What is a trust?

A trust allows a policy holder to give their life insurance policy to someone else (the beneficiary). 

It's a great way to ensure that the proceeds of life insurance is not considered to be a part of the estate when the policyholder dies, which can help to manage any potential inheritance tax liability.

For joint life policies, both of the policyholders must agree to place their policy in trust.

The estate is the word used to define everything a person owns at the time of their death.

How do trusts work?

Setting up a trust means completing a form (sometimes known as a ‘trust deed’). The trust means the policy is given away to the trustees who then legally own the policy and look after it for the benefit of the beneficiaries. The policyholder will still be responsible for paying the insurance premiums, but the trustees will be responsible for keeping the trust deed and any other documents safe. They make the claim on the policy and ensure that the money goes to the beneficiaries as the policyholder intended.

Depending on the type of trust, it can provide lots of flexibility to change who will benefit and when, so that changing circumstances - such as having more children or grandchildren - can be taken into account.

There are also inheritance tax benefits, because the policy proceeds should not be part of the estate when the policyholder dies, leaving more for the beneficiaries.

Discretionary Trust

This trust offers most flexibility as the trustees can choose from a wide range of beneficiaries, including the spouse and children of the settlor.

The trustees have discretion about which of the beneficiaries will receive any benefits, how much they will receive and when they will receive it.

Download our Discretionary Trust Guide.

Absolute Trust

The beneficiaries are chosen at outset and are absolutely entitled to the trust fund.

The beneficiaries are fixed at outset and cannot be changed in the future.

Download our Absolute Trust Guide.

Survivor's Discretionary Trust

This is a special trust which is only suitable for use with joint life first death policies.

The trustees pay the policy proceeds to the surviving settlor if he or she survives the first to die by 30 days. 

However, should the survivor die within 30 days of the first to die, the trustees pay the policy proceeds to the beneficiaries of the trust.

Please note that a joint policy which is not written in trust will pay to the surviving life insured.

Download our Survivor's Discretionary Trust Guide.

Flexible Trust

This is like a Discretionary Trust, but it is more complicated. There are two types of beneficiaries:

  1. Default beneficiaries who are first in line to the policy proceeds unless the trustees choose somebody else from the list of discretionary beneficiaries instead. Default beneficiaries can be replaced by discretionary beneficiaries at any time. It is essential that a default beneficiary be appointed when the trust is created
  2. Discretionary beneficiaries who are a group of people who may benefit from the trust, but only if the trustees choose them. You may wish to consider taking specialist advice before using this type of trust.

Download our Flexible Trust Guide.

It’s a good idea to supplement the discretionary, survivor’s discretionary and flexible trust with a letter of wishes which is a non-binding way of letting the trustees know who the settlor would like the policy proceeds to benefit.

Personal trusts explained

A trust allows a policy holder to give their life insurance policy to someone else (the beneficiary). It's a great way to ensure that the proceeds of life insurance is not considered to be a part of the estate when the policyholder dies, so their beneficiaries won't face the burden of inheritance tax on their life policy. For joint life policies, both of the policyholders must agree to place their policy in trust.

The estate is the word used to define everything a person owns at the time of their death.

Setting up a trust means completing a form (sometimes known as a ‘trust deed’). The trust means the policy is given away to the trustees who then legally own the policy and look after it for the benefit of the beneficiaries. The policyholder will still be responsible for paying the insurance premiums, but the trustees will be responsible for keeping the trust deed and any other documents safe. They make the claim on the policy and ensure that the money goes to the beneficiaries as the policyholder intended.

Depending on the type of trust, it can provide lots of flexibility to change who will benefit and when, so that changing circumstances - such as having more children or grandchildren - can be taken into account.

There are also inheritance tax benefits, because the policy proceeds should not be part of the estate when the policyholder dies, leaving more for the beneficiaries.

There are three key roles in a trust:

  • The settlor (or settlors) - The person giving away their life insurance policy is called the settlor, and if the policy is jointly owned then both policy holders are automatically joint settlors. Once the settlor has put their policy into trust they no longer personally own it, as it's owned by the trustees. However, the settlor is automatically a trustee of all Legal & General’s insurance trusts, so they do retain some control on how the trust is managed as a trustee. The settlor chooses the trustees and the beneficiaries and completes the trust form to set up a trust.
  • The trustees - The trustees are the people chosen to look after the trust, make any future claims, and arrange for the money to be paid to the beneficiaries in line with the policyholder’s instructions. Once the policy is put in trust, the trustees take legal ownership of the trust fund and must then act in the best interests of all the beneficiaries at all times, and can only do what is allowed in the trust deed.
  • The beneficiaries - These are the people (or person) who the policyholder wants to receive the money from the trust fund

Most life policies can be put into trust, so anyone who owns a policy can set one up.

If a policy is not placed in trust, the policy proceeds may not go to the people who the policyholder wants to receive it.

Without a trust, for a joint policy, the policy proceeds will automatically be paid to the survivor.

However, for a single life policy not placed in trust, there could be a delay before the policyholder’s spouse or partner receives the policy money. This is because when the policyholder dies, if the policy is not in trust then the personal representatives of the estate may need to obtain what’s called a ‘grant of representation’ or ‘probate’ so that they have the authority to claim the policy proceeds. It can in some cases take months to get the grant. The policy money will then be distributed in accordance with the will, or a ranking order of entitlement (starting with next of kin) known as ‘intestacy’ if there is no will.

The worst case could be if the policyholder is not married, and has not made a will, their partner may not be legally entitled to the policy proceeds at all unless placed in trust.

The policyholder can also give their trustees a letter telling them how they would like the money shared out, which is called a letter of wishes.

If the policy is not in trust and there is no will, the policyholder’s partner would not be entitled to the policy proceeds.

To access the money their personal representatives may need to obtain probate so that they have the authority to deal with the estate.

However, the personal representatives can usually only apply for probate to be the administrator of the estate if they are the person’s next of kin, e.g., their spouse (or registered civil partner) or child. They can also apply if they’re separated from the person but were still married or in a registered civil partnership when they died.

Unfortunately, it's not possible for someone to apply for probate if they were the partner of the person but were not their husband, wife or registered civil partner when they died.

The policy money will then be distributed in accordance with the will, or the laws of intestacy if there was no will. This means there could be a delay before the spouse receives the policy money or where there are children involved it could be mean that the money goes to them in accordance with the laws of intestacy.

The worst case could be if the policyholder is not married or in a registered civil partnership and has not made a will, as their partner would not be entitled to the policy proceeds at all unless placed in trust.

A trust is a good way to help decide now who should benefit from the insurance money.

There are three key benefits to putting life policies in trust:

  • Control - Specify who the beneficiaries are, and who the policyholder trusts to act on their wishes. This can be really important if the policyholder isn’t married or in a registered civil partnership, as without a trust the money forms part of the estate and may not automatically go to who the policyholder wants. It's also important when there are children involved, as it can help ensure that they receive some financial support, but do not get full access. The policyholder will also be one of the trustees, so they can work with the other trustees to ensure the money goes to who they intended.
  • Reduce Inheritance Tax - When a life policy is not held in trust, it will normally be considered part of the estate, meaning that it can be subject to inheritance tax (40% of any part of the estate over the value of £325,000). Using a trust should mean that the money paid out from the life insurance will not be part of the estate, increasing the amount of money passed on to the policyholder’s loved ones.
  • Faster payment of the money - Using a trust should help ensure that the money paid out from the life insurance can be paid to the people of the policyholder’s choice quicker, without the money being held up by their personal representatives having to apply for probate.

Once the trust has been created it cannot usually be cancelled before it has served its purpose. Depending on the wording of the trust it may also be that the policy cannot be cancelled without the permission of the trustees.

The trust will usually only end once the policy has ended and there is nothing left in the trust - this could be once a claim has been made and the trustees have distributed all the insurance money to the beneficiaries. Or it could be if the length of time the policy was taken out for has ended and a claim has not been made.

Once the trust has been set up, it cannot usually be cancelled before it's served its original purpose. This means it's important to be sure our trusts are right for the policyholder before they complete one.

The policyholder can put their personal life insurance policy into trust when they take it out, or at any time after that. Sometimes people transfer ownership of their life insurance policies - for example by providing it as security for a loan, or to pay for a funeral where the policy has funeral cover - which may mean that a trust cannot be used.

The trustees control the trust. They are the legal owners and they are responsible for managing the trust. They look after the trust fund and following a claim on the policy will make arrangements for the payments to be made to the beneficiaries.

The settlor does not control the trust, though they are usually still responsible for paying the premiums on the policy.

The beneficiaries do not control the trust, although in some circumstances they can force trustees to act, for example, with an absolute trust, if all the beneficiaries are over 18 years old and of sound mind, they can act together to give directions to the trustees.

Yes, in most circumstances it can. However, it's important to note that with the Discretionary, Absolute and Flexible trusts, if the money from the insurance policy is payable on the first person to die (the first settlor), the surviving person on the policy would not be a beneficiary and therefore would be unable to receive any of the money. If the policyholders want the surviving person or life assured to be a beneficiary of the trust they should consider using our Survivors Discretionary Trust.

Our Survivors Discretionary Trust is a special trust that is for use with joint life insurance policies that pay out on the first death. The surviving person becomes the beneficiary, but if they should die within 30 days of the first to die then the children or other loved ones become the beneficiaries automatically.

Trustee FAQs

Yes, to ensure we can pay the policy proceeds to the trustees quickly and easily, they need to tell us if their details change so our records are up to date.

The trustees are people appointed to be the legal owners of the policy. The trustees will inform us of any claim and receive the policy proceeds and then pass it on to the beneficiaries. The policyholder will automatically be a trustee.

We usually suggest that a maximum of four but a minimum of three trustees however it's up to the policyholder to decide how many trustees they want. There must be at least one other trustee.

The trustees need to be over 18 and of sound mind, and it's usually easier if they're UK residents. If the policyholder wants non-UK trustees, they might want to consider taking specialist legal and tax advice on this.

Choosing who will be a trustee is an important decision and one that should be considered carefully. Many people choose a family member or friend, while some choose to appoint a professional trustee (such as a trust company) or a solicitor or an accountant. It can choose a mix of both. There should be at least two trustees, and these should be people the policyholder trusts to act in the best interests of the beneficiaries.

Yes, trustees can be changed. Depending on the trust wording, the trustee’s permission may be needed for them to be removed from the trust. It’s also possible to appoint a new trustee to the trust.

If a trustee dies, the remaining trustees can still carry on but a replacement may be needed.

The trustees take legal ownership of the policy. Where a protection insurance policy is the only thing in the trust, they will usually not have much to do until the time comes to make a claim. When making trust decisions they must agree with all the other trustees and must act in the best interests of the beneficiaries. Trustees are not allowed to profit personally from their role as trustee.

To make a claim, the trustees will need:

  • the trust form (and any subsequent deeds)
  • the original insurance policy schedule and
  • the death certificate or medical evidence for any terminal or critical illness claims.

They should then contact us to start the claim process.

Legal & General trusts

We have four types of trusts. Absolute, Discretionary, Survivor's Discretionary and Flexible Trusts.

  • Discretionary Trusts give the trustees a wide list of beneficiaries to choose from, including the spouse and This list is called the ‘discretionary beneficiaries’.
  • Survivor's Discretionary Trusts are for joint life policies where the money will be paid when the first person dies.
  • Absolute Trusts are for when the policyholder wishes to make a complete and final list of their specific beneficiaries, without the ability to change or add beneficiaries in the future.
  • Flexible Trusts include the same wide list of discretionary beneficiaries as a discretionary trust but also names ‘default beneficiaries’. Default beneficiaries are named by the settlor and are entitled to the policy proceeds in the event of a claim unless the trustees decide to pick from the list of discretionary beneficiaries.

They are all "split trusts" which means that any Critical Illness or Terminal Illness Cover can still be used to benefit the original policy holder (the settlor), while any payment after their death is used for the beneficiaries. Or, the policyholder can choose to give away their critical illness or terminal illness benefits too, to the beneficiaries if these apply to the policy.

A Discretionary Trust is the most flexible type we offer.

The types of people who may benefit are listed in the trust form and include the policyholder’s spouse, children and other family members.

It is called a Discretionary Trust because the trustees have a lot of discretion about who to pay.

The policyholder can add other people they would also like to be discretionary beneficiaries. However none of the beneficiaries can be sure they will benefit from the trust as it is the trustees who choose which potential beneficiaries will receive any money, how much and when.

As such a simple letter from the policyholder stating what they would like to happen to the money, which is called a letter of wishes PDF size: 587KB is often a helpful way to give the trustees guidance. This letter to the trustees can be rewritten at any time but should always be sent directly to the trustees (we don't need to see it).

A survivor's discretionary trust is similar to our standard discretionary trust, however it's only suitable for joint life policies, where the insurance money is paid after the first person dies. It is different from a standard discretionary trust because, in a survivor's discretionary trust, if one of the original policy owners (settlors) dies but the other settlor survives, the survivor will be entitled to the money from the policy. If both settlors die within 30 days, then the discretionary beneficiaries will benefit in the same way that they would for a standard discretionary trust.

An absolute trust is the least flexible type of trust that we offer. The beneficiaries are named individuals who cannot be changed in the future. For example, children born later cannot be included or a spouse cannot be removed following a divorce. The beneficiaries are absolutely entitled to the trust fund, and the trustees do not have discretion on who to pay.

A flexible trust is similar to a discretionary trust, but it is more complicated. There are two types of beneficiaries. The first type of beneficiary is the default beneficiary who are named by the settlor and are entitled to the policy proceeds unless the trustees decide to choose someone from the discretionary list of beneficiaries instead. The discretionary beneficiaries is a list of people who the trustees can decide to give money to at their discretion.

  • Life Insurance, Increasing Life Insurance and Decreasing Life Insurance
  • Critical Illness Cover
  • Family and Personal Income Plans
  • Whole of Life Protection Plan
  • Over 50's Life Insurance

  • Income Protection Benefit
  • Pension related products, including Tax Efficient Life Insurance Plan (TELIP)
  • Independent Critical Illness Cover

Trusts and life insurance policies

Our trust service is free and simple to use. In just a few easy steps a life insurance money can be put in trust.

The settlor (person giving away their life insurance) usually pays the insurance premiums. If the policy is cancelled because payments lapse, the trust also comes to an end.

Depending on the trust wording, the settlor may be able to cancel the policy themselves, without the trustee’s permission. This isn’t always the case however and sometimes the trustee’s permission will be needed to cancel the policy.

If the settlor stops paying their premiums, the trustees can't force them to pay and if nobody else pays the policy will usually lapse. If the policy lapses the trust will also come to an end.

Trusts and tax

The main tax which is affected when insurance protection policies are placed in trust is inheritance tax (IHT). Inheritance tax is usually payable on all of the assets that someone owns when they die, including their house and any life insurance policy proceeds.

It’s possible to reduce a potential IHT bill by using a trust for the life insurance policy. Once a policy is placed in trust, it will not usually form part of the estate. This means that the money which is subject to inheritance tax may be less, thereby increasing the amount of money that the policyholder’s loved ones receive after their death.

Everybody has a ‘nil rate band’ (currently £325,000), which means that IHT would not be payable if the estate is worth less than this. In addition there are some exemptions which can help to reduce the value of the estate. For more information on IHT, specialist advice may be required.

Trusts and beneficiaries

The beneficiary is any person or people that the policyholder would like to receive the money from a claim on the policy. They can choose to name specific people and how much they will get in an Absolute Trust. Or if they think their family circumstances may change in the future or want to leave the policy in the hands of someone they trust to share out the insurance money, they can choose a Discretionary Trust.

Yes, but it depends on the type of trust.

Under a Discretionary Trust, the trustees have the flexibility to choose from a wide list of people and can decide when and how much each person will get from the policy proceeds. The policyholder can help them decide by giving the trustees a letter of how they would like the money shared, called a 'letter of wishes'.

It is not possible to change the beneficiaries of an Absolute Trust.

Important points to note

It's important to understand that in some cases, the trust itself might have to pay tax. However in the majority of cases, there are unlikely to be significant tax considerations, before the life policy pays out and also after a claim, as long as the money is paid out of the trust immediately.

However tax considerations can become increasingly important if the money is held in trust for longer and professional advice may be needed to help with this.

Certain types of policy such as the Family and Personal Income Plan (FPIP) policy usually pays out a monthly amount after the policyholder’s death for the length of time they decided so the potential for tax within the trust is higher.

The different types of trust are treated differently for IHT purposes. Discretionary, Survivors Discretionary and Flexible trusts are all types of relevant property trusts (RPT) and are largely treated in the same way; Absolute trusts are treated as a Potentially Exempt Transfer (PET).

For more information about tax please refer to our technical guides, or seek specialist advice.

Other related guides

consumer - LGI - BANNER - brothers under umbrella - 730x411

Putting life insurance in trust

Manage your estate by putting life insurance in trust. Read our guide on choosing trustees and protecting your beneficiaries.
Grandmother with grandson in the garden

How much can I gift to my grandchildren?

There are rules around gifting family money, such as children and grandchildren. Read our guide to Inheritance Tax gifts and allowances.
Grandpa and grandkids on a day out

How to write a letter of wishes

Writing a letter of wishes alongside a will ensures you can express how you’d like your estate to be distributed. Read our guide to farewell wishes.