Putting a life insurance policy in trust

One of the major benefits of putting life insurance in trust is that the money is protected from inheritance tax, and your life insurance policy is looked after by your chosen trustees.

Here we look at the benefits of putting life insurance in trust, how it works, why it might be right for you, and how to set it up.

What is a life insurance trust?

Putting your life insurance in trust allows you to decide who you want the money to go to if you die. This could be your family members or friends - they're called the beneficiaries.

The life insurance policy is then looked after by trustees, who could be family members, friends, or a solicitor, until it’s paid out to a beneficiary. These people meet to discuss the policy and must all agree before any action is taken.

It doesn’t cost anything to set up. If you're using a solicitor, there may be additional legal fees.

You don’t have to put a policy in trust. But if you do, it’s not included when the tax office calculates your inheritance tax bill after you die.

What are the different types of trust policies?

The 5 different types of trust are:

• Absolute trust: You name the beneficiaries and you can’t change these names in the future.
• Discretionary trust: You write a letter of wishes stating where you want your money to go when you die. Your trustees have a high level of discretion about paying your beneficiaries, using your letter as a guide. You’re also able to change and add beneficiaries to the policy.
• Flexible trust: This is similar to a discretionary trust. There can be more than 1 beneficiary and you choose how your money will be split between them when you die. There’s usually a default beneficiary and a discretionary beneficiary. Discretionary beneficiaries are set up by the trust, and if none are appointed everything goes to the default beneficiary.
• Split trust: Let's say your life insurance policy is linked to another policy, such as one for critical illness cover. A split trust means you can use the critical illness element if you need to and the life insurance remains within the trust.
• Survivor's discretionary trust: This is a way for couples with a joint life insurance policy to put it in trust. The surviving partner gets money straight from the trust on the death of the first partner before other beneficiaries. If the surviving partner dies within 30 days, the trust can pay the other beneficiaries.

The trustees of your trust legally own the policy and therefore it’s up to them to keep the document safe. They can ask a solicitor to do this, for a fee. If you were to die, it’s important the trustees have this document and any other relevant paperwork.

What are the advantages of putting life insurance into a trust?

There are several advantages to putting life insurance in trust:

• You specify exactly where you want your money to go and when. For example, you can appoint a trustee to look after money if a child is under the age of 18.
• It helps lower inheritance tax. When you die, the money included in your life insurance policy is taken into account when the tax office calculates the value of your estate. This sum of money is taxed at 40% if it goes over the allowance (currently £325,000). The money from your trust is paid directly to your beneficiaries and not counted as part of your estate. This could help lower your estate's value enough to limit the impact of inheritance tax.
• Probate doesn't need to happen on the money from your policy. Probate is a legal process and it confirms an executor’s authority to deal with your assets and possessions. Probate needs to be granted before any money is paid out and this is sometimes a lengthy process, especially if there’s no will in place.
• Payouts can be faster. Life insurance money held in trust doesn't need to go through probate. This means the time it takes to make payments to your beneficiaries should be quicker than if you don’t have a policy in trust.

What are the disadvantages of putting life insurance in trust?

• The main disadvantage of putting a life insurance in trust is that it can be difficult to make changes once it's set up.

Can I change my life insurance after it is written in trust?

When your life insurance policy is written in trust it technically is then owned by the trustees. This means it's not straightforward - and sometimes not possible - to make changes to the life insurance policy after this point. Your insurer should give you information about this when you put it into trust. Before you make a commitment, make sure you read all the terms and conditions and understand how changes can be made.

How do I put a life insurance policy in trust?

When you buy a new life insurance policy you usually have the option by your insurer to put the policy in trust. You can usually do this straight away or you can do it at a later date by completing a life insurance trust form.

If you have a policy and want to put it into trust, you might need to speak to, and pay for, help from a solicitor for this to happen.

How long does it take to get the money from a life insurance policy in trust?

The timeframe for a payout from a life insurance claim in trust depends on the situation of the death and how complicated the policy is. If there are lots of beneficiaries or there are complications around the death this could be a lengthy process. You should be given an indication of when the money will be paid out by a solicitor after the death.

How old do you have to be to access money from a trust?

If a trust has been set up for a child, they usually can’t access this money until they turn 18. However, the person who set up the trust can set a specific age for when they can access the money. Until they turn 18, you should appoint a guardian to manage the money, if this is what you want.

How long does a trust last?

Legally a trust can last 125 years, but you can determine how long you want it to last when you set it up. It’s more common to keep your policy in trust while you need it, such as while you’re paying off a mortgage or have young children.

Should cohabiting couples put life insurance in trust?

It's worth considering. Married couples and those in a civil partnership are automatically given legal rights including those around death. When one dies, the other should automatically inherit their money and assets, even if a will isn’t in place. They can also share their inheritance tax allowance.

This isn’t the case for those who live together - also called cohabiting couples. These couples have no automatic claim over a life insurance policy not written in trust, or a partner’s estate if they’re not specifically mentioned in a will.

For these couples, putting a policy in trust means they can name the person they want their money to go to. They also avoid inheritance tax being due on this part of their money.