Trusts: Information about life insurance placed into trust

Putting your life insurance into trust

When you put your life insurance in trust, you choose who receives the pay out. And when the time comes, they'll usually receive it quickly and in a tax-efficient way.

It’s important to understand that, in placing your policy in trust you are transferring the ownership and control of your policy to those you appoint as your trustees. You’ll retain some of that control as one of the trustees, however there may be some aspects of your policy administration going forward that will require approval from those you appoint as trustees. Your trustees will also receive copies of correspondence relating to the policy, this includes letters relating to the payment status and or any missed premiums for example.

It’s important to consider these elements upfront so you can agree how you’ll manage the practical day to day administration of your policy with your trustees going forward.

Basic facts of trusts

A trust is a legal arrangement allowing a person to transfer money or assets (such as property, life insurance, investments or other possessions) out of their estate and ‘gift’ them to someone else (the beneficiary).
We’ll assume the asset being placed in trust is a life insurance policy.
This is done by creating a 'trust deed', which details who is involved in the trust (the parties to the trust) and the terms of the trust (the trust provisions).
Normally, placing a policy in trust is an 'irrevocable act', which means once the policy is in trust this decision can't be changed later on, so you need to really think if putting your policy in trust is right for you. You can put a life insurance policy into trust as soon as it starts, or at a later date.

Who's needed to set up a trust?

Settlor (or 'Donor' on an Absolute Trust) - the person(s) who puts assets into a trust (transferring legal ownership to the trustees) and appoints trustees to look after the trust.
Trustee - the person(s) who looks after the contents of the trust on behalf of the beneficiary(ies) - normally trustees are the settlor themselves, and at least one other person, someone else the settlor trusts and who is likely to outlive them.
Beneficiary - the person(s) who can benefit from the trust.

Advantages

Proceeds are paid to the right person/people.
Proceeds are paid out quickly, so long as there's at least one surviving trustee - we won't need to wait for probate.
Helps reduce Inheritance Tax liability - as proceeds fall outside your estate on death*.

*We’ve based this information on our understanding of current UK law and HM Revenue and Customs practice at December 2022. Bear in mind, any changes to these rules could affect how proceeds are treated for tax.

Disadvantages

Once your policy has been put into trust, you can't change your mind and take the policy out of trust later on.
You're giving up ownership and sole control of your policy, although you would be one of the trustees, so during your lifetime you would have some control.
If you want to make changes to your policy we may require permission from your trustees to do that.
As the legal owners your trustees will receive correspondence relating to your policy including copies of communications related to missed premiums or under-payment.

Looking for advice?

If you are unsure if putting your policy into trust is right for you, or you’re not sure which trust to choose, you should seek professional help from a solicitor or your financial adviser – you may have to pay for the advice you receive.

You can find more information about setting up a trust at www.moneyhelper.org.uk

Got a question?

Take a look at some of the most frequently asked questions about putting a life insurance policy into trust.

Frequently asked questions