Should I Put My Life Insurance in Trust?

Should you put your life insurance in trust? For most people the answer is yes.

Writing a policy in trust keeps the payout outside your estate for inheritance tax, gets the money to your loved ones faster by avoiding probate delays, and lets you control exactly who receives it. Best of all, it is usually free to set up.

This guide explains what a trust does, the pros and cons, the main types, and how to arrange one.

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Key Takeaways

• Putting life insurance in trust keeps the payout outside your estate, so it is not counted for inheritance tax and does not add to any bill your family faces.
• The claim is normally paid faster, because money in trust sidesteps the probate process that can otherwise delay access for months.
• It is especially important for unmarried couples, who have no automatic right to inherit and could otherwise miss out entirely.
• There are downsides to weigh. Once set up a trust is hard to unwind, and some trust types can face their own periodic tax charges — so take advice for anything beyond a simple set-up.

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What is a trust?

A trust is a legal arrangement that lets you hold an asset — here, a life insurance policy — for the benefit of the people you choose. Three roles are involved:

• The settlor — you, the person setting up the trust.
• The trustees — the people who manage it and hand the payout to the right people. This can be a family member, a friend, a professional, or you plus others.
• The beneficiaries — those who receive the money, such as your partner, children, or a named category like "my children".

Putting a policy in trust is usually called "writing life insurance in trust". Because the policy is legally held by the trust rather than by you, the proceeds fall outside your estate when you die.

Should you put your life insurance in trust? The benefits

It keeps the payout out of your estate for inheritance tax

If a policy is not in trust, the payout is normally added to your estate. If your estate is above the inheritance tax threshold, that can mean 40% of the excess going to HMRC.

Writing the policy in trust keeps the money outside the estate, so it passes to your beneficiaries without adding to an IHT bill. Our guides to the inheritance tax 7 year rule show how trusts fit into wider estate planning.

It speeds up the payout

Money paid into your estate usually has to wait for probate, which can take months. A trust bypasses this, so trustees can access the funds quickly — a real help when your family needs money for the mortgage or funeral costs.

It gives you control

You decide who benefits and, with some trust types, when. This is vital for unmarried couples and those not in a civil partnership, who have no automatic right to inherit from each other.

Without a trust (and a will), a surviving partner could be left with no claim on the policy.

The downsides to consider

Putting insurance in trust is right for most people, but it is not without trade-offs:

• It is hard to reverse. Once a policy is in trust the arrangement is difficult to unwind, so choose the structure carefully.
• You give up some direct control. The trustees legally manage the policy, so pick people you trust completely.
• Some trusts have their own tax charges. Discretionary trusts in particular can face periodic inheritance tax charges — typically reviewed on each 10-year anniversary — plus charges when money leaves the trust. These rules are complex.
• You still pay the premiums. The policy must be kept in force as normal.

Types of trust for life insurance

The right type depends on how much flexibility you want.

Bare (absolute) trust

The beneficiaries are fixed from the start and cannot be changed. They are entitled to the payout in full as soon as it becomes payable. Simple, but inflexible.

Discretionary trust

The trustees have discretion over who benefits and how much they receive, guided by a letter of wishes you leave them. This offers the most flexibility if your circumstances or family may change, but can carry the periodic tax charges noted above.

Flexible trust

Common with insurance policies. There is a default beneficiary, but trustees can vary who else benefits through a "power of appointment" — a middle ground between bare and discretionary trusts.

How to put life insurance in trust

The process is usually straightforward and free:

1. Choose the type of trust that suits your needs.
2. Appoint your trustees — reliable people, ideally more than one, so someone can act if a trustee dies.
3. Name your beneficiaries, either individually or as a category.
4. Ask your insurer for the trust form. Most providers have a standard deed and will supply it on request.
5. Complete and return it, and keep the paperwork safe. Our guide on where to store a will is a useful companion for keeping documents together.

You can do this when you first take out the policy or at any point afterwards. There is no extra charge for a standard provider trust, though a solicitor may charge for a bespoke arrangement.

Frequently asked questions

Should I put my life insurance in trust?

For most people, yes. It keeps the payout outside your estate for inheritance tax, avoids probate delays, and lets you control who receives the money — all usually at no cost. It is especially valuable for unmarried couples. Take advice before using a complex trust type.

Does putting life insurance in trust avoid inheritance tax?

It keeps the payout out of your estate, so the proceeds themselves are not counted for inheritance tax. This is different from removing your whole IHT liability — the rest of your estate is unaffected. Some trust types can also carry their own periodic charges.

Can I change the trust once it is set up?

It depends on the type. A bare trust fixes the beneficiaries permanently, while discretionary and flexible trusts allow trustees to vary who benefits. This is why the choice of trust matters so much up front.

Do I still pay premiums if my policy is in trust?

Yes. The trust changes who legally owns the policy and receives the payout, but the cover only stays in force if the premiums continue to be paid.

General information only, not financial advice. Pension and tax rules change — check gov.uk or speak to a qualified, FCA-authorised adviser.