Life Insurance in Trust: How to Write Your Policy in Trust and Why It Matters
Life insurance is widely held for a variety of purposes: income protection, mortgage repayment, family protection, and business protection. But a significant majority of individual life insurance policies are written "in the sole name" of the policyholder — meaning the death benefit forms part of the policyholder's estate on death.
The consequences: the payout is subject to inheritance tax at 40% on the portion above the nil-rate band, it is subject to probate delay (the payout cannot be made until probate is granted, which can take six months to over a year), and the choice of who benefits is governed by the will (or intestacy rules) rather than the policy terms.
Writing a policy in trust solves all three problems with a short form that most insurers provide free of charge. It is one of the most effective yet underused estate planning tools available.
Why Write a Policy in Trust?
1. Keeps the Payout Outside the Estate
A policy written in trust is owned by the trustee(s), not the policyholder. On death, the sum assured is paid to the trust and held for the benefit of the specified beneficiaries — it does not form part of the deceased's estate. This means:
- No inheritance tax is payable on the payout
- The nil-rate band is preserved for other estate assets
- For a £500,000 life policy written in trust (rather than forming part of an estate subject to 40% IHT), the saving is £200,000
This is not tax avoidance — it is straightforward use of trust law as Parliament intended. HMRC does not challenge properly established trusts for life policies.
2. Avoids Probate Delay
When a policy is not in trust, the insurer cannot pay out until the executor produces the Grant of Probate — a legal document confirming authority to administer the estate. Probate currently takes on average six months from application, and can take significantly longer in complex estates or periods of high demand.
During this time, the family has no access to the policy proceeds. If the policy was intended to pay a mortgage, fund living expenses, or cover business liabilities, the delay can be critical.
A policy written in trust is paid directly to the trustees without requiring probate. Trustees can make a payment to beneficiaries within days or weeks of the insurer receiving the death claim.
3. Specifies Exactly Who Benefits
The trust document names the beneficiaries — who receives the money. This is separate from the will. If the will is challenged, superseded, or unclear, the trust proceeds pass to the named beneficiaries regardless.
This is particularly valuable for:
- Protecting children from a previous relationship
- Providing for an unmarried partner (who may have limited rights under intestacy)
- Specifying proportions with precision
- Ensuring business protection proceeds go to the right parties
Types of Trust for Life Policies
Absolute (Bare) Trust
The beneficiaries are fixed and irrevocable. Once established, the beneficiaries cannot be changed. The policyholder names specific people (e.g., "my children in equal shares") and that cannot be altered.
Appropriate when: the beneficiaries are certain and will not change. Simple, clear, and administratively straightforward. Payout to adult beneficiaries is straightforward — they can request payment at any time.
Not appropriate when: beneficiaries may change (e.g., you may have more children; a beneficiary may predecease you; you may divorce and wish to change the beneficiary).
Discretionary Trust
The trustees have discretion to decide which of the potential beneficiaries receives the money, in what proportions, and when. The trust document establishes a class of beneficiaries (e.g., "my spouse, my children and their descendants") but leaves the specific distribution to the trustees.
Appropriate when: flexibility is needed. The policyholder cannot predict which family members will need the money most. Future family circumstances are uncertain. The policyholder wants to prevent a vulnerable beneficiary from receiving a lump sum they might mismanage.
Potential drawback: periodic charges (every ten years) and exit charges may apply to discretionary trusts over certain values under the IHT "relevant property" regime. For most life policy trusts, the timing of the payout means the trust is short-lived and the charges are minimal or zero — but take advice on large policies.
Flexible Trust (Gift Trust)
A flexible trust allows the policyholder (as settlor) to retain certain rights while still writing the policy in trust. For example, the right to change the beneficiaries or add new ones. Most modern policy trust forms offered by insurers are flexible trusts.
Flexible trusts are the most commonly recommended form because they balance the IHT and probate benefits with the ability to update the trust if circumstances change.
Split Trust
Specific to policies that cover both a critical illness benefit and a life benefit. The critical illness payout is retained by the policyholder (so they can use the money while alive), while the life payout goes into trust for the beneficiaries. A single trust is not appropriate here because the critical illness payout is for the policyholder's own benefit.
Choosing Trustees
The trustees legally own the policy and are responsible for distributing the proceeds to beneficiaries. Choosing appropriate trustees is important.
A common arrangement: the policyholder appoints two or more trustees, typically:
- Spouse or civil partner: natural choice; has a stake in the outcome; is likely to act quickly
- Adult child (if adult): can act if the spouse predeceases
- Solicitor or professional trustee: provides independence and expertise, particularly for larger policies; may charge a fee
Most policy trusts allow for at least two individual trustees plus the option to add a professional trustee. Having only one trustee is technically possible but inadvisable — a co-trustee provides a check and ensures continuity.
Trustees must act in the best interests of the beneficiaries, not themselves. Conflicts of interest should be avoided or managed. The Trustee Act 2000 codifies trustees' duties, including the duty to invest prudently and diversify.
Updating the Trust After Divorce or Remarriage
A change in personal circumstances — divorce, remarriage, the death of a trustee or beneficiary — may require the trust to be updated.
For a discretionary or flexible trust: the policyholder (as settlor) may be able to add or remove beneficiaries by completing a deed of amendment. This is usually provided by the insurer's trust documentation pack.
For an absolute trust: the beneficiaries are fixed. A divorce does not automatically remove a former spouse from an absolute trust. This is a significant risk — review absolute trusts on relationship breakdown.
On remarriage: consider whether the new spouse should be added as a potential beneficiary. The existing trustees and the policyholder's wishes should be documented and updated.
Failing to update a life policy trust after a significant life event is a common estate planning error. An ex-spouse named as sole beneficiary of a £500,000 policy in an absolute trust will receive the full payout regardless of a subsequent divorce — the trust overrides the will.
The "No Trust" vs "In Trust" Comparison
To illustrate the difference for a 45% taxpayer with a £500,000 term life policy (single person; nil-rate band £325,000; no RNRB assumed):
| Not in trust | In trust | |
|---|---|---|
| Estate on death (other assets) | £1,000,000 | £1,000,000 |
| Life policy payout | +£500,000 | N/A (outside estate) |
| Total estate | £1,500,000 | £1,000,000 |
| IHT on estate (40% above £325,000 NRB) | £470,000 | £270,000 |
| Additional IHT attributable to policy being in estate | £200,000 | £0 |
| Probate delay on payout | Yes (6–18 months) | No |
| Net family receives from policy | Reduced by IHT | Full £500,000 |
The cost of establishing the trust: the insurer's standard trust form, completed by the policyholder and witnessed — free.
The Process for Writing in Trust
- Contact the insurer or obtain the trust form from your IFA
- Choose the trust type (discretionary/flexible for most people)
- Name the trustees (minimum two; avoid sole trustee)
- Name or describe the beneficiaries (specific names or a class description)
- Sign and date in the presence of witnesses (trust formalities vary by insurer form)
- Return the completed form to the insurer
- Keep a copy with your other important documents and inform your solicitor
For new policies: ask to write in trust at the point of application. Most insurers facilitate this at no cost.
For existing policies: contact the insurer to obtain a trust form for the existing policy. Many existing policies can still be written in trust, though take advice if the policy has significant cash value (writing an existing investment policy in trust may be treated as a gift for IHT purposes).
Trust law and IHT rules are complex. This article provides a general overview and does not constitute legal or financial advice. Always seek qualified professional advice before establishing a trust.
How Global Investments can help
Global Investments reviews clients' life insurance arrangements as part of wider financial planning — identifying policies that are not in trust and assessing whether the structure is appropriate for the client's estate planning objectives. We can coordinate with insurers and solicitors to establish appropriate trust arrangements and ensure the trust is consistent with the wider estate plan. Contact our team to review your protection and estate planning arrangements.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.