Writing life insurance in trust is a widely used arrangement in the UK, yet it remains one of the less well understood aspects of holding a life insurance policy. When a policy is not written in trust, the payout on death forms part of the estate, passes through probate, and may be subject to inheritance tax. Writing a policy in trust changes how and when beneficiaries receive the payout.
This article explains how writing life insurance in trust works in the UK, the types of trust available, and the key implications. It is general information only and does not constitute legal or financial advice. Anyone considering a trust arrangement should seek appropriate professional guidance.
What Writing Life Insurance in Trust Means in the UK
When a life insurance policy is written in trust, legal ownership of the policy is transferred from the policyholder to trustees. The trustees hold and manage the policy on behalf of the named beneficiaries. On the policyholder's death, the insurer pays the sum assured to the trust rather than to the estate.
The trustees then distribute the funds to the beneficiaries according to the terms of the trust deed. Because the payment goes to the trust and not to the estate, it does not form part of the deceased's estate for probate or inheritance tax purposes, subject to how the trust is structured and applicable tax law.
Why People Write Life Insurance Policies in Trust
There are two practical reasons people commonly write life insurance policies in trust:
- Speed of payment: a payout made to a trust does not require probate to be granted before it is distributed. Probate can take several months, and in complex estates considerably longer. Beneficiaries can receive trust assets more quickly.
- Inheritance tax position: assets that form part of the estate may be subject to inheritance tax where the estate exceeds the applicable thresholds. Assets held in a correctly structured trust sit outside the estate and are generally not included in the inheritance tax calculation, though this depends on the type of trust and the individual's circumstances.
Further information on inheritance tax thresholds and how trusts interact with them is available from HMRC's guidance on inheritance tax.
Types of Trust Used for Life Insurance in the UK
Bare Trust
A bare trust, also called an absolute trust, names specific beneficiaries with fixed entitlements. Once set up, the beneficiaries and their shares cannot be changed. This structure is straightforward to administer but inflexible. It is suitable where the identity of beneficiaries is fixed and unlikely to change.
Discretionary Trust
A discretionary trust gives trustees the power to decide how to distribute funds among a defined class of potential beneficiaries. This provides flexibility where the policyholder wants the trustees to be able to respond to changing circumstances, for example to include children who are currently minors or to allow for future changes in family composition.
Flexible Trust
A flexible trust is often used where a policy covers both life and critical illness. Under this structure, a critical illness payout goes directly to the policyholder, while a life insurance payout goes to the trust. This prevents a critical illness payout from being locked in trust and inaccessible to the person who needs it during their lifetime.
Inheritance Tax and Life Insurance Trusts in the UK
Inheritance tax in the UK is charged at 40% on the taxable value of an estate above the nil-rate band, currently 325,000 pounds. There are additional allowances in some circumstances. A life insurance payout that forms part of the estate and pushes the total value above this threshold would be subject to this charge. A correctly structured trust can prevent this. HMRC's guidance on trusts and tax provides further information on how different types of trust are treated for tax purposes.
Probate and Trust Payouts
Probate is the legal process through which a deceased person's estate is administered. Assets that pass through a trust do not form part of the probate estate and can be distributed by the trustees without waiting for probate to be granted. The UK Government's guidance on applying for probate explains how this process works. For beneficiaries who need prompt access to funds, the trust route can make a significant practical difference.
What Is Involved in Setting Up a Trust for Life Insurance
Most insurers provide standard trust deed documentation that can be completed when the policy is set up. For straightforward family protection arrangements, a solicitor is not always required, though their involvement is advisable where the estate is complex or where there are family circumstances that may affect the distribution of assets.
The trust deed specifies who the trustees are, who the potential beneficiaries are, and how the trustees are to exercise their discretion. It is important that the deed is completed correctly and that the trustees understand their responsibilities.
Frequently Asked Questions
Q: Can beneficiaries be changed after a policy is written in trust?
Whether beneficiaries can be changed depends on the type of trust. Under a bare trust, the beneficiaries are fixed and cannot be altered. Under a discretionary trust, the trustees have flexibility in how they distribute funds among the defined class of beneficiaries, and in some cases the class itself may be varied. Anyone wishing to change trust arrangements should take legal advice from a qualified solicitor.
Q: Does writing a policy in trust cost anything? Most insurers provide trust deed documentation at no additional charge as part of the policy setup process. The cost of a solicitor, if one is involved, will depend on the complexity of the arrangement. For straightforward family trusts, insurer-provided documentation is generally sufficient, though legal advice is recommended for more complex estates.
Tanweer Hussain is the editor at TopQuote, an independent life insurance broker and appointed representative of The Openwork Partnership with over 20 years of experience. He oversees the accuracy of all published content, including the factual and regulatory detail that matters most on claims-related topics. All content on this page has been reviewed for FCA compliance.