The Problem: Life Assurance Outside a Trust
Most people take out life assurance with the best of intentions — to protect their family. Yet a critical, frequently overlooked detail means the proceeds often fail to reach beneficiaries quickly, and in some cases are substantially eroded before they do.
When a life assurance policy is not written in trust, the death benefit forms part of the policyholder's estate. This creates two distinct problems.
The first is inheritance tax. In the United Kingdom, estates above the nil-rate band (currently £325,000, with a residence nil-rate band of up to £175,000 for qualifying homes) are subject to inheritance tax at 40%. A £500,000 life assurance payout landing in an estate already worth £1 million could cost beneficiaries £200,000 in tax.
The second is probate delay. Before any asset in an estate — including the life assurance proceeds — can be distributed, the estate must go through the grant of probate process. This typically takes between six and eighteen months, and in complex or contested estates it can extend further. During this period, surviving family members may have no access to the funds intended for their immediate financial support.
Writing a life assurance policy in trust resolves both problems simultaneously.
What Writing in Trust Actually Means
When a policy is written in trust, you (the settlor) transfer legal ownership of the policy to trustees, who hold it on behalf of named or specified beneficiaries. Critically:
- The policy sits outside your legal estate on death
- The death benefit is paid directly to the trustees, then distributed to beneficiaries
- No grant of probate is required for the policy proceeds
- Because the asset is not in your estate, it is not subject to inheritance tax
The trust is established at the time the policy is taken out, though it is also possible to write an existing policy into trust retrospectively, subject to certain considerations (see below).
Most major insurers — including Aviva, Legal & General, Royal London, AIG Life, Zurich and Vitality — provide standard trust deed documentation free of charge. There is no legal fee to write a policy into trust using an insurer's own deed, though complex arrangements may benefit from bespoke legal advice.
Types of Trust Used for Life Assurance
Bare Trust
A bare trust specifies fixed, named beneficiaries. From the moment the trust is established, those individuals have an absolute right to the trust assets. This arrangement is clean and administratively straightforward: the trustees have no discretion — they must pay the proceeds to the beneficiaries as specified.
The limitation is inflexibility. If a beneficiary dies before you, or their circumstances change materially (for example, they develop a vulnerability that makes an outright lump sum inadvisable), the trust cannot be adjusted without legal intervention.
Bare trusts are most appropriate where beneficiaries are clearly identified adults and no future flexibility is anticipated.
Discretionary Trust
A discretionary trust names a class of potential beneficiaries — typically "my spouse and children and remoter descendants" — but gives the trustees discretion over who receives the proceeds, in what proportions, and when.
This is the most widely recommended structure for life assurance because:
- Beneficiaries can be changed (within the class) without affecting the trust's validity
- Trustees can respond to circumstances that were not foreseeable at outset
- The settlor can provide a letter of wishes — a non-binding but influential document guiding trustee decisions
- It accommodates future children and stepchildren if the class is drawn broadly enough
The flexibility does introduce a layer of trustee responsibility. Trustees must act in the best interests of all beneficiaries, not merely the most obvious ones, and should keep records of their decisions.
Absolute Trust
An absolute trust, like a bare trust, confers an irrevocable entitlement on named beneficiaries. The key distinction is that once established, it genuinely cannot be changed — not the beneficiaries, not the trustees' powers, nothing. This certainty is sometimes useful in business protection contexts where clarity and finality are required.
For personal life assurance, the discretionary trust is generally superior because of its flexibility.
The Settlor-Excluded Trust: A Critical Requirement for IHT Planning
For inheritance tax mitigation to work, the settlor — the person whose life is assured and who creates the trust — must be excluded from benefiting from the trust assets. This is known as a settlor-excluded trust.
If you could potentially receive the trust assets during your lifetime (for instance, if the policy had a surrender value and you were listed as a potential beneficiary), HMRC may treat the trust as a gift with reservation of benefit, pulling the asset back into your estate for IHT purposes.
All reputable life assurance trusts designed for IHT purposes include a settlor-exclusion clause. When reviewing any trust deed, check explicitly that the settlor is excluded. This is standard in insurer-provided discretionary trust deeds but should always be confirmed.
Nomination Versus Trust: Understanding the Difference
Many policyholders, particularly those with workplace schemes or overseas policies, confuse a beneficiary nomination with a trust. The distinction is significant.
A nomination is a statement of preference — you indicate who you would like to receive the death benefit. Nominations are typically used in group life schemes (where the employer or scheme trustees have discretion). A nomination is guidance, not a legally binding instruction.
The trustees of a registered group life scheme must consider your nomination but are not bound by it. The proceeds may still pass through your estate if the trustees so decide, and even when paid outside the estate, they are not covered by the same IHT protection that a personal trust provides.
In contrast, a trust is a legally binding arrangement. The trustees are under a legal obligation to administer the trust assets in accordance with the trust deed and in the interests of the beneficiaries. Properly structured, the proceeds are legally outside your estate.
For personal life assurance, only a trust — not a nomination — provides robust IHT protection and probate bypass.
Relevant Life Plans: Already in Trust by Default
Relevant Life Plans, which are individual life assurance policies paid for by an employer (typically used by company directors), are always held in a discretionary trust by their nature. The trust is a statutory requirement under HMRC's conditions for the tax treatment to apply.
This means the death benefit from a Relevant Life Plan is automatically paid outside the employee's estate, without any additional trust structuring required. This is one of several reasons Relevant Life Plans are particularly efficient for owner-directors — see our dedicated guide for the full picture.
Retrospectively Writing an Existing Policy into Trust
It is possible to write an existing policy into trust, but there are considerations.
The transfer of an existing policy into trust is technically a disposal for inheritance tax purposes. If the value of the policy at the time of transfer (its surrender value) is above your available annual IHT exemption (£3,000 per tax year, with the ability to carry forward one year's unused exemption), this may constitute a chargeable transfer.
For pure protection term assurance with no surrender value, this concern is largely theoretical — the policy has minimal value before a claim. For whole-of-life policies with significant cash value, the position is more complex and specialist advice should be sought before retrospective transfer.
Choosing Trustees
The choice of trustees matters. Trustees have legal responsibilities and should be people who understand their duties, or professional trustees.
Most individuals appoint their spouse or civil partner as a trustee, alongside one other person — a sibling, close friend or professional. The settlor themselves may be a trustee (subject to the settlor-exclusion requirement), which allows involvement in future decisions without the ability to receive the proceeds.
A professional trustee — typically a solicitor or trust company — adds expertise and continuity, particularly where the estate is complex. Professional trustees charge ongoing fees, which should be weighed against the value of the arrangement.
If all trustees predecease you, the trust does not fail — but practical administration becomes difficult. Discretionary trusts should have at least two trustees at all times, with a mechanism to appoint replacements.
Keeping the Trust Current
A trust written at outset does not automatically reflect your changing circumstances. A letter of wishes should be updated periodically to reflect:
- Changes in marital status
- Birth of children or grandchildren
- Changes in the financial circumstances of potential beneficiaries
- Changed attitudes to distribution
The letter of wishes is not legally binding but carries significant weight in guiding trustee decisions. It should be stored securely alongside the trust deed, and trustees should be informed when it is updated.
Practical Steps for Existing Policyholders
If you currently have a life assurance policy not written in trust, the following steps are recommended:
- Establish whether the policy has any surrender value (important for the gifting considerations above)
- Obtain the trust deed from your insurer — most provide a standard discretionary trust deed at no cost
- Choose your trustees and confirm their willingness to act
- Complete and sign the trust deed with witnesses
- Notify your insurer that the policy is now held in trust and provide the trustees' details
- Draft a letter of wishes and store it with the trust deed
- Review your will — assets held in trust do not pass under your will, so your will should be updated to reflect this
International Considerations
For internationally mobile clients, trust structuring for life assurance requires careful consideration of the jurisdiction where the trust is established and the domicile of the settlor.
UK-domiciled individuals benefit from the familiar framework described above. Non-UK domiciled individuals (or those with changing domicile) should take advice on whether an offshore trust structure — typically Isle of Man or Guernsey — is more appropriate. Offshore trust structures for international life assurance policies can offer additional flexibility across multiple jurisdictions.
Rules in this area are subject to legislative change. Readers should not rely on this guide as legal or tax advice. Individual circumstances vary significantly and professional advice is always required before establishing or amending a trust.
How Global Investments Can Help
Global Investments works with HNW individuals and internationally mobile clients to ensure protection arrangements are structured as efficiently as possible.
Our advisers can review your existing life assurance policies to identify those not yet written in trust, model the potential IHT exposure on untrusteed policies, and guide you through the appropriate trust structure for your circumstances — whether that is a standard UK discretionary trust, a bespoke arrangement, or an offshore trust for international policies.
We work alongside your existing legal advisers or can introduce specialist trust solicitors where required. Contact our protection team to arrange a review of your current arrangements.
The content of this guide is for information only and does not constitute legal, tax or financial advice. Inheritance tax rules and trust law are subject to change. Always seek qualified professional advice for your individual circumstances.
This guide is for general information only and does not constitute financial or insurance advice. Policy terms, premium rates, and insurer eligibility criteria change — always verify current terms with a qualified independent adviser before taking out any policy.