Writing life insurance in trust

Writing a life insurance policy in trust means the payout goes to the people you choose, directly and quickly, rather than into your estate. A trust is a legal arrangement in which the trust takes ownership of the policy, and the people you appoint as trustees become its legal owners, holding it for the benefit of the people you name¹.

The two effects people most often want are speed and tax. Because the policy is usually held outside your estate, probate is normally not needed before the money is paid, so your family can receive it just a few weeks after the death certificate is issued rather than waiting months². And because the payout usually sits outside the estate, it is normally exempt from inheritance tax¹. Most insurers offer the option when you first buy the policy, and there is normally no extra charge¹.

What writing life insurance in trust means

A trust is a legal arrangement under which the policy owner creates a legal framework to hold assets for third parties. In the case of life insurance, the asset held is the policy itself, and the third parties are the beneficiaries who will eventually receive the money⁴. The arrangement is set out in a document called a trust deed, which details who is involved in the trust, known as the parties to the trust, and the terms of the trust, known as the trust provisions⁵.

Three roles make up a life insurance trust. The settlor is the person who puts the policy into trust, normally the policyholder. The trustees are the people who take over control of the policy: once the trust is in place, they become the legal owners of it and are responsible for keeping the trust's purposes in mind³. The beneficiaries are the people the money is intended for. As the settlor, you remain responsible for paying the life insurance premiums³.

The practical effect is that the payout no longer belongs to you or to your estate. Social Security Scotland's guidance on recovering funeral costs from an estate makes the point plainly: if life insurance money is written in trust, it is not counted as part of the estate and would not go towards the funeral expenses⁶. Instead, the insurer pays the trustees, and the trustees pay the beneficiaries according to the trust deed.

This is different from simply naming a beneficiary informally or telling your family who the money is for. Without a trust, the payout usually forms part of your estate and is dealt with by your executors under your will, or under intestacy rules if you have no will. With a trust, the policy is legally separated from you, which is what produces both the speed and the tax benefits, but also the loss of flexibility covered later in this guide.

Why people use a trust: faster payouts without waiting for probate

The main benefit is that the payout can usually be released more quickly, because it does not normally need to wait for probate¹. Probate is the legal process in which an estate is divided up according to a will, or according to intestacy rules where there is no will. If a life insurance payout is part of the estate, the family may have to wait until probate has been completed before receiving the money, which can take weeks or months¹.

With a policy in trust, your family does not need to go through that process to receive the insurance money, and independent guidance suggests they can be eligible for the payout just a few weeks after the death certificate has been issued². Zurich makes the same point from the provider side: policy proceeds are usually paid quicker, providing there is at least one surviving trustee, so the beneficiaries will not need to wait for probate⁵. Halifax likewise notes that any payout may not require probate, meaning beneficiaries could receive the money faster⁷.

How the payout reaches your family, with and without a trust.

Speed matters because the weeks after a death are often when money is needed most, for a funeral or for household bills. It also matters because claims themselves can take time: the financial regulator has flagged long delays in some life insurance payouts, and how long a claim takes varies⁹. A trust cannot speed up the insurer's own claim process, but it removes the extra wait for probate on top of it.

The speed benefit is not the only reason people use trusts. Guidance on the different types of life insurance policy notes that a payment into trust means the family receives the money sooner, as they will not have to wait for the often lengthy probate period, and that the payment does not form part of the estate so is not subject to inheritance tax¹⁰. The next section deals with that tax effect.

Keeping the payout outside your estate for inheritance tax

If your life insurance is not written in trust, the payout will usually be treated as part of your estate when you die¹. That can matter for inheritance tax. Where an estate is valued at more than £325,000, inheritance tax can be charged on the insurance payout, for example where a joint life and critical illness policy was claimed but not received before death¹¹. By contrast, providing the life policy is written into trust, the payout will not form part of your estate¹².

Independent reporting on inheritance tax planning makes the same point: if a life insurance policy is written in trust, the payout is usually exempt from inheritance tax, meaning it can help beneficiaries settle a tax bill quickly without waiting for probate¹³. This pairing, a payout outside the estate that can be used to pay the tax due on the estate, is one of the most common reasons people write policies in trust.

The tax treatment of the transfer itself follows the rules for gifts. For inheritance tax purposes, placing assets into a trust is treated in the same way as making a gift: the assets could be subject to inheritance tax if you die within seven years, but fall out of your estate if you live longer¹⁴. A discretionary trust provider puts the same rule as seven years, after which the value of the trust is outside your estate for inheritance tax purposes¹⁵.

Two cautions apply. First, a trust used to give away assets late in life does not defeat care fee assessments: transferring property into a lifetime trust carries significant risk of being considered deliberate deprivation of assets, meaning you are unlikely to qualify for financial support from your local authority¹⁴. Second, the rules around what counts in an estate are changing: from April 2027, pension reforms may bring most unused pension funds into inheritance tax, which changes the sums for people using life insurance as part of an estate plan¹⁶. The dedicated page on life insurance and inheritance tax covers the tax rules in more detail.

Discretionary trust: trustees decide who gets what and when

A discretionary trust is the most common form used with life insurance, and it works differently from a simple gift. The trustees have a pool of potential beneficiaries and the discretion to benefit any of them: they decide which beneficiaries receive money, how much and when¹⁸. Which's guidance describes it as giving the trustee greater power to decide how much the beneficiaries get and how frequently they get it, plus any conditions you set².

This flexibility is the point of the arrangement. Legal & General's guide explains that when the trustees make these decisions, they use your letter of wishes as a guide³. A discretionary trust is usually accompanied by such a letter, which gives guidance to the trustees on how the settlor would like the assets to be used, although the trustees retain the final say¹⁸. Halifax describes the same structure: your trustees have the choice of how to spend the money after you pass away, and they can select who receives what⁷.

Zurich's trust documentation sets out where this type of trust fits. Its discretionary trust is designed for use with single or joint life second death life insurance policies, including those that provide illness cover as well as life cover, and it enables the settlors to keep illness cover payable during their lifetimes while giving away their death benefits, taking them outside their estates for inheritance tax purposes²⁰. It also handles the common joint policy problem: if both settlors die within 30 days of each other, the life cover benefit is paid into the trust, whereas without it the proceeds could face inheritance tax as part of the estate of the last policyholder to die²⁰.

A discretionary trust also protects the money in ways a direct gift does not. Assets not allocated to a particular beneficiary cannot form part of that person's bankruptcy or estate for divorce purposes, and assets held in the trust are not included in a beneficiary's estate¹⁵. The trade-off is tax and administration, covered later in this guide. Zurich also lists where a discretionary trust should not be used, including where you want to retain all policy benefits, where the policy is assigned as loan security, or for joint lives first death policies²⁰.

Choosing trustees and beneficiaries

Trustees hold real power, so the choice matters. They can be family members, friends or perhaps a solicitor¹. Which's guidance adds a practical test: make sure the trustees are people you will easily be able to contact in future, and ideally not also beneficiaries². Halifax notes that you can make trustees and beneficiaries the same people, though having at least one trustee who is not a beneficiary may be advisable⁷. The narrow question of how many trustees are needed is covered on the trustees page.

The reason for preferring at least one independent trustee is the survival problem. Zurich notes that proceeds are usually paid quicker providing there is at least one surviving trustee⁵. If all the trustees die before the policyholder, the trust can become difficult to administer, so choosing people likely to outlive you, and keeping the trust's records where they can be found, protects the arrangement.

Beneficiaries can be almost anyone. Legal & General states you can choose any person, or people, to be your beneficiaries, entitling them to receive a payout³. The typical options are a spouse or civil partner, a child, another relative, a friend, or a charity³. Halifax's list is similar: a partner or spouse, children, grandchildren or stepchildren, wider family such as cousins, aunts or uncles, friends, or an organisation or charity⁷.

Who you name matters most where your family situation is not covered by intestacy rules. For unmarried couples without a will, assets are divided according to intestacy rules, which could leave out the partner, including any life insurance payouts not in trust². A trust, with a partner named as beneficiary, is one way to make sure the payout reaches them regardless of what the will says or whether one exists. The question of whether a will is still needed is covered in the FAQ above.

Setting up a trust: usually free when you buy the policy

You can write a life insurance policy in trust when you first buy it. Most insurers offer this during the application, and there is normally no extra charge¹. Which's guide says the same: most insurers will offer it as an option when you initially take out the policy, and there should not be any extra charge². Macmillan's guidance for people affected by cancer, which explains the option alongside the types of insurance available, puts it simply: there is usually no charge for this²¹.

The option is not limited to one kind of policy. All life insurance policies can be written in trust, including family income benefit, which pays a regular income rather than a lump sum; writing it in trust keeps the payout outside the estate and avoids probate²². Joint life policies and whole of life policies can also be placed in trust, and guidance on whole of life cover recommends having it written into trust so the eventual payout does not form part of your estate for tax purposes¹⁶.

The mechanics are straightforward when done at the start. Halifax notes that if you have yet to open a life insurance policy, you may be able to put it into trust straight away as part of your application⁷. Legal & General says you can put your personal life insurance policy in trust when you take it out, or at any time after that, provided you simply own the policy³. The trust is created by completing and signing a trust deed, which names the parties and sets out the trust provisions⁵.

If you prefer help, Halifax's guidance is to contact a legal professional, who will help set up a trust deed outlining the terms, the trustees and the beneficiaries⁷. That route can cost money, but the insurer's own trust forms, used directly, are normally free. The page on buying protection insurance explains where advice fits when taking out cover.

Putting an existing policy in trust

A life insurance policy can be put into trust at any time, not only when it is first written². Legal & General confirms the same from the provider side: you can put your personal life insurance policy in trust when you take it out, or at any time after that, provided you own the policy³.

The difference is paperwork and potentially cost. You can put an existing policy in trust later, but it may involve extra paperwork, and if you need help from a financial adviser or solicitor, there could be a cost¹. The trust deed still has to be created and signed, naming the trustees and beneficiaries, and the insurer has to be told the policy is now held in trust so it pays the trustees on a claim⁵.

One limit is worth knowing in advance. Legal & General's trust tool notes that transfers such as providing the policy as security for a loan may mean a trust cannot be used¹⁹. A policy assigned to a lender, which sometimes happens with mortgage-related cover, may not be available to put in trust until the assignment ends. Guidance on mortgage protection life insurance notes that the final lump sum is paid to your estate, not direct to the mortgage company, though it can be left in trust²³.

Timing also affects the tax outcome. Because placing a policy in trust is treated like a gift for inheritance tax, the transfer could be subject to inheritance tax if you die within seven years of making it¹⁴. Putting the policy in trust early, when you buy it, gives the longest runway for that seven year period to pass.

A trust is usually irrevocable: what you give up

The main thing you give up is the ability to change your mind. Placing a policy into trust is an irrevocable act: once you have done it, you cannot withdraw the policy from the trust later⁴. Zurich states the same: once your policy has been put in trust, you cannot usually change your mind and reverse the decision⁵. Which's guide classes it as an irrevocable act that cannot be undone².

Once the trust has been created, it cannot usually be cancelled before it has served its purpose, and depending on the wording, the policy may not be cancellable without the trustees' permission¹⁹. This is why the choice of trustees, covered earlier, matters so much: you are handing control of a valuable asset to other people, permanently. The narrow question of who signs to cancel a policy held in trust is covered separately.

Some flexibility survives, depending on the trust. While a policyholder is still alive, certain elements of the policy can be changed, including the beneficiaries⁴. Halifax says you may be able to change the beneficiaries on your trust, depending on the type of trust agreement you have, though it can cost to change the terms and a legal professional is needed⁷. Which's guidance is more cautious: once you put a policy in trust, you generally cannot simply change your mind, and depending on the type of trust it may be difficult to change the beneficiaries or take the policy out later¹.

The irrevocability also interacts with care costs. Transferring assets into a trust late in life carries significant risk of being considered deliberate deprivation of assets, meaning you are unlikely to qualify for financial support from your local authority¹⁴. A life insurance trust set up when you are young and healthy is a different case from one set up on the eve of a care assessment, but the principle is worth knowing before you sign anything.

Tax and paperwork a discretionary trust can bring

A discretionary trust is a tax-paying arrangement in its own right, and that is its main downside. Inheritance tax is normally paid at 20% when setting up a trust, on value in excess of the nil rate band²⁴. A 6% charge is then levied on the value of the trust's total assets every ten years, less the £325,000 inheritance tax allowance²⁴. Where the settlor pays the initial tax themselves, the grossed up rate in one worked example is 25%, with £43,750 due on a £500,000 transfer²⁴.

There are also exit charges when money leaves the trust. In one worked example, a £50,000 distribution five years after the tenth anniversary produced an exit charge of £849.75, and the trustees must pay and report this tax by the end of the sixth month after the exit event²⁴. Bestinvest summarises the ongoing burden: if the value of the trust exceeds the nil rate band, a small inheritance tax charge may be due every ten years, and a tax return must be lodged every year to report income and gains¹⁵.

Registration may also apply. The Trust Registration Service was first set up in 2017, and initially only required trustees to register if the trust incurred income tax, capital gains tax, inheritance tax or related taxes²⁴. HMRC's official guidance on reporting inheritance tax on a gift into a trust says to check whether the trust needs registering before you start²⁵. Will trusts have their own rule: they can remain unregistered for up to two years, and must be registered if they still exist after that¹⁸.

Not every trust faces all of this. Canada Life's documentation for its discretionary trust notes that tax relief may be available on premiums paid to the insurer²⁶. Legal & General warns of the opposite risk: if money remains in trust for a prolonged period, certain trust-related tax charges could arise³. The practical position is that a discretionary trust holding a life insurance payout for a short period before distribution is simpler than one holding assets for decades, and the tax rules for trusts are covered in more depth on the inheritance tax and trusts pages of the site.

Trusts for a disabled relative and means-tested benefits

Trusts have a specific purpose when the beneficiary is disabled: they protect money without putting means-tested benefits at risk. A disabled person's trust or a discretionary trust can stop money and property counting in means testing for benefits or social care, including supported living²⁷. Scope's guidance is direct: money in a trust does not count towards income or savings limits for means testing²⁷. Sense describes the aim as safeguarding a disabled family member's social care funding and means-tested benefits, and supporting them if they need someone to manage their money²⁸.

The two trust types work differently. A discretionary trust gives flexibility to use the assets as and when needed to meet the needs of the disabled person, without affecting means-tested benefits, provided it is set up correctly²⁸. But if trustees give money directly to the disabled person, it counts towards income and savings and could affect means-tested benefits or social care²⁷. A disabled person's trust is more restricted but usually taxed more lightly: you will most likely pay more tax on a discretionary trust compared to a disabled person's trust²⁷.

Eligibility for a disabled person's trust depends on the person's situation. It can be set up if the person is receiving a benefit that makes them eligible, including the care component of Disability Living Allowance at the middle or higher rate or the mobility component at the higher rate, or if they qualify as a vulnerable beneficiary or lack mental capacity to manage their finances²⁷. DLA itself is not means tested³⁰. The tax rules are complicated, so Sense advises talking to a solicitor first if considering one²⁸. Mencap's Wills and Trusts service covers both discretionary trusts and disabled persons trusts, and notes that a discretionary trust is flexible and can be changed to a disabled person's trust if needed²⁹.

Trustees of these trusts take on real duties. They must know what means-tested benefits and social care the disabled person receives, check the savings and income limits for means testing, communicate regularly and agree all decisions²⁷. Trustees can be family members and friends, or professionals such as solicitors or accountants who will charge for their services²⁸. Trusts can also make it harder for other people to financially abuse a disabled person, because trustees need to approve purchases²⁷.

The same protection extends to other assets. A trust set up as part of a will is a way to support a disabled relative by protecting money or property, and it is not counted as income or savings for benefits purposes³¹. Nearly 60% of people receiving a qualifying disability benefit also receive a means-tested benefit payment, according to a parliamentary report on support for disabled people, which is why protecting eligibility matters so much in practice³². The severe disability premium included in some means-tested benefits is one example of what can be at stake³³. A trust in a will takes effect only after death, which is one reason a lifetime trust, or a life insurance trust set up now, is used for life cover that needs to pay out under rules set in advance²⁸.