Putting life insurance in trust
Writing life insurance in trust is one of the best ways to protect your family’s future in the event of your death. Your life insurance policy is a significant asset. By putting life insurance in trust you can manage the way your beneficiaries receive their inheritance. Here, we take you through the benefits of life insurance trusts, how the process works, who’s involved and the other considerations.
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What is a Trust?
Trusts are a straightforward legal arrangement. They let you leave assets to friends, relatives or whoever you pick to be your beneficiaries. A trust is managed by one or more trustees – family members, friends, or a legal professional – until the trust pays out to your beneficiaries. This can either happen upon your death, or on a specified date such as when a child turns 18.
Your life insurance policy can be put into a trust, which is often referred to as ‘writing life insurance in trust’. One of the main benefits of this approach is that the value of your policy is generally not considered part of your estate.
How does putting life insurance in trust work?
Before placing your life insurance policy into trust, you'll need to decide which type of trust is right for your circumstances. The main options are:
Discretionary Trust
A Discretionary Trust gives your trustees flexibility to decide which beneficiaries receive the money from your policy when you're no longer around, and how much each beneficiary receives. When making these decisions, they'll use your Letter of Wishes as a guide. This document sets out how you'd like the trust to be managed and who you'd like to benefit.
Flexible Trust
A Flexible Trust combines certainty with flexibility by allowing for two types of beneficiaries.
- Default beneficiaries are entitled to any income generated by the trust. In practice, if the life insurance policy is the trust's only asset, there is unlikely to be any income.
- Discretionary beneficiaries can receive income or capital from the trust if the trustees decide to make appointments (distributions) to them during the trust period.
If no appointments are made by the end of the trust period, any remaining benefits will pass to the default beneficiaries.
Survivor’s Discretionary Trust
A Survivor's Discretionary Trust is designed for jointly owned life insurance policies. If one policy owner dies, the surviving policy owner is entitled to inherit the deceased's share of the policy before any benefits pass to other beneficiaries.
If both policy owners die within 30 days of one another, the proceeds can be distributed to beneficiaries in the same way as under a Discretionary Trust.
Absolute Trust
With an Absolute Trust, the beneficiaries are chosen when the trust is created and cannot usually be changed later. This means any future children or a new spouse following a divorce cannot automatically be added as beneficiaries.
One benefit of an Absolute Trust is that it can help speed up the payment process, as the beneficiaries are clearly identified from the outset. As with other trusts, any Inheritance Tax liability is likely to be nil or negligible.
After your trust has been set up
Once your trust is in place, your trustees become the legal owners of the policy and are responsible for keeping the trust deed safe. They may choose to store it with a solicitor or in a secure location at home. When the time comes to make a claim, your trustees will need access to this document.
As the settlor, you'll remain responsible for paying your life insurance premiums. You may also wish to seek independent legal advice to help ensure the trust has been set up in a way that meets your needs and objectives
You can choose any person, or people, to be your beneficiaries - this will entitle them to receive a pay out in the event a valid claim is made. Contrary to what some people may assume, there are no rules that restrict who your life insurance beneficiary can be. For example, you could choose the following:
While you won't be able to change your beneficiaries if you have an Absolute Trust, if you take out a Discretionary Trust, your trustees will have the freedom to decide who your beneficiaries are, and how much they're entitled to receive from a pay out.
The advantages and disadvantages of putting life insurance in trust
Advantages |
Disadvantages |
| Control over who benefits - you can choose who receives the payout and appoint trustees to manage it on your behalf. | You may not be able to reverse the decision – some trusts cannot easily be changed once established. |
| Your loved ones could receive the payout sooner - because the policy is usually held outside your estate, probate may not be required before the money is paid. | You could have less control in the future – trustees may need to agree to certain decisions. |
| Could help reduce an Inheritance Tax bill - as the payout will often not be included as part of your estate for Inheritance Tax purposes. |
Inheritance Tax may still be due - although placing a life insurance policy in trust can offer tax advantages, tax may still be payable in some circumstances.
|
The benefits of writing life insurance in trust
Writing your life insurance policy in trust can help make sure the money from your policy goes to the people you want it to. Whether a life insurnace trust is right for you will depend on your personal circumstances and who you'd like to benefit, but it could help your loved ones receive the payout more quickly and may reduce the amount of Inheritance Tax payable, depending on your circumstances.
Control over who benefits
When you write a life insurance policy in trust, you decide who should receive the payout and who you'd like to appoint as trustees to manage it. Without a trust, the payout could form part of your estate and may not always pass to the people you intended. This can be particularly important if you're not married or in a civil partnership.
Faster access to the payout
Without a trust, when you die your beneficiaries may need to wait for probate to be granted before the policy proceeds can be distributed. By writing your life insurance policy in trust, your loved ones could receive the payout within a couple of weeks of the death certificate being issued, helping them access the money sooner when they may need it most.
You can read more in our guide to the probate process.
Could help reduce an Inheritance Tax bill
Money paid out from a life insurance policy written in trust will usually not form part of your estate for Inheritance Tax purposes. This could help preserve more of the payout for your beneficiaries. However, tax rules can be complex and exceptions may apply. For example, certain trust charges can arise if money remains in trust for a prolonged period. The standard Inheritance Tax rate is currently 40% on the value of an estate above the £325,000 tax-free threshold.
Disadvantages of putting life insurance in trust
While there are benefits to putting life insurance in trust, there are also some potential drawbacks to consider.
You may not be able to change your mind
Depending on the type of trust you choose, it may be difficult or impossible to reverse the decision once your life insurance policy has been placed in trust. This could limit your ability to change who benefits from the policy in the future.
You could have less control
Once your life insurance policy is in trust, trustees will have legal responsibilities for managing the trust and distributing the proceeds in line with its terms. This means some decisions relating to the trust may need to involve the trustees.
Inheritance Tax may still apply
Although putting life insurance in trust can offer tax advantages, there may still be circumstances where tax charges apply. For example, if money remains in trust for a prolonged period, certain trust-related tax charges could arise.
Joint life insurance in trust
How does a joint life insurance policy work?
A joint life insurance policy covers two people but usually pays out once following a valid terminal illness or death claim. In most cases, the payout is made after the first death to help support the surviving partner financially.
Once the policy has paid out, it ends, leaving the surviving partner without life insurance cover under the policy. If both partners die at the same time, then the lump sum would be paid to the estate of the younger person covered by the policy.
Joint life insurance and Inheritance Tax
If the policyholders are cohabiting, then the surviving partner receives the lump sum but, for Inheritance Tax (IHT) calculations, half the cash sum is deemed to form part of the deceased's estate. This is not normally an issue for married couples or civil partners.
With a joint life insurance policy, there is still a benefit in putting the policy into trust, especially if you're not legally married or in a civil partnership. For a married couple, life insurance policies include an Inheritance Tax exemption for the spouse or civil partner, but this doesn't apply if you have a joint policy and are cohabiting.
How can a Survivor's Discretionary Trust help?
If you place your policy into a Survivor's Discretionary Trust, the trustees can pay any money to the surviving partner as long as they're still alive 30 days after the death of their partner.
If the surviving partner dies within 30 days of the other partner, the trustees can pay the money straight to the beneficiaries of the trust (for example, your children or grandchildren). This way, the beneficiaries usually won't pay Inheritance Tax on the money as part of either your or your partner's estate.
Joint or single life insurance?
Married or cohabiting couples can choose to take out a single life policy each, a joint policy that provides cover for both partners, or a combination of both.
A single policy covers one person and, when that person dies, the policy pays out a lump sum to their estate. If a couple have a policy each, the policies remain completely independent of each other and can be for different amounts or with different companies. Each policy pays out when the policyholder dies.
Please remember, life insurance is not a savings or investment product and has no cash value unless a valid claim is made.
How long does a trust last?
Technically, your trust can last up to 125 years – there is no expiry date for trusts set-up for charitable purposes – but ultimately, your trust agreement should last however long you deem necessary. Your personal circumstances may influence the length of time you stipulate; for example, the trust could last until a child grows up and marries.
Is there an extra cost?
There is no added cost to putting life insurance in trust with L&G. You can put your personal life insurance policy in trust when you take it out, or at any time after that – you simply need to own the policy. You should note that if you transfer your life insurance policy to another individual, this may have implications for your trust so it’s best to contact us directly or seek legal advice.
You can visit our Online Trust Hub to help you choose the right Trust for you.
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