Should you put your life insurance in trust?

It can be a common misconception that trusts are complex legal structures that are only for the ultra-wealthy. But in actual fact, putting your life insurance policy in trust can be fairly straightforward – and it might be a good idea. Let’s first look at what a trust is.

What is a trust?

A trust is a legal arrangement that you can put assets into (like money, property, possessions or a life insurance policy). It lets you leave assets to the people you choose (the beneficiaries). If you put your life insurance in trust, the trust then pays out when you die or, for example, when your beneficiary turns 18.

How does a trust work?

As the settlor of the trust (the person setting it up), you choose one or more people to manage the trust for you (the trustees). Trustees can be anyone who’s over 18 – family, friends or professionals like solicitors.

The trustees effectively own the assets in your trust and have control over what happens to them. They manage the trust in line with certain rules that are set out in the trust’s documentation and with the beneficiaries’ best interests in mind. One of the trustee’s responsibilities is to keep the trust deed safe after it has been set up.

There are different types of trust, so before you set one up, you should get legal advice to make sure it fits your needs. It can be tricky or impossible to make changes to a trust once you’ve set one up, depending on which type you choose.

Life insurance is a policy that pays out a lump sum (called a death benefit) to someone you nominate if you die while the policy is active. If you don’t put it in trust, any payout will be considered part of your estate and could be subject to inheritance tax (IHT) or be used to pay off debts rather than go to the people you want it to. You can read more about what happens to debts after you die in our guide.

Because it can be difficult or even impossible to make changes to a trust, it’s always best to get professional advice before you sign on the dotted line.

Here are some of the advantages and disadvantages of putting your life insurance in a trust.

There are several different types of trust and they all have different rules to suit different requirements. Here’s a brief rundown, but it’s a good idea to get professional advice to make sure you make the right choice.

Discretionary trust: This is the most flexible type of trust. You write a letter of wishes that explains what you’d like to happen, but your trustees aren’t legally obliged to follow that. They have full discretion about who will benefit and how much they’ll get.

Survivor’s discretionary trust: This is a discretionary trust that includes a survivorship option for joint life insurance policies. If one partner dies first, they would benefit from the policy payout, so this can be useful for unmarried couples. If you die within 30 days of each other, the payout works the same as it does for a normal discretionary trust.

Absolute trust: You’ll sometimes see this type of trust called a bare or fixed trust. It gives you a bit more control, as you choose who your beneficiaries are when you set it up, and how the payout would be split. However, it’s also the least flexible option, as you can’t change any choices, or the beneficiaries, no matter what – even if you divorce or have more children, for example. It’s handy if you’re certain that nothing will change and payouts are likely to be quick.

Flexible trust: This is a bit of a blend of a discretionary and an absolute trust. You pick one or more beneficiaries at the start, called the default beneficiary. You can choose discretionary beneficiaries as well, for example, any potential grandchildren. The trustees can change the default beneficiaries and the amount paid. So it could be a good option if your situation might change, but you don’t have as much control as to who gets paid and how much.

Split trust: You might also be able to choose a split trust, which can work if you have life insurance with benefits like critical illness cover. It allows you to split the payouts between the trust and your policy. It means you can still claim personally for a payout if you fall ill during the term of your policy. And then the life insurance payout will go to your beneficiaries when you pass away.

Not all providers offer the full range of trusts

If you have a specific trust in mind, check that your life insurance provider offers this. For example, LV= only offer fixed, flexible and split trusts. So it’s worth doing your homework before you go ahead and set up your life insurance policy.

Who can be a beneficiary?

You can pick anyone you want to be a beneficiary - your children, a family member or a friend. You can even choose a charity, if you like. Just remember that if you set up a discretionary trust, your trustees will be able to decide who benefits, and how much. With an absolute trust, the beneficiaries named at the start can’t be changed, so you’ll want to be absolutely certain about your choices.

Who can be a trustee?

Trustees are important, as they’ll manage your trust for you and it’s up to them to administer the trust in the beneficiaries’ best interests. When you appoint trustees you should choose wisely and make sure you trust them to carry out big decisions for you. They need to be 18 and you can have one or more trustees. They can be anyone - friends, family, solicitors, corporates – but they should understand that it’s a big responsibility.

If you want to put your life insurance in trust, it’s easiest and quickest to do it when you set up your life policy. Most providers offer it for free – all you need to do is choose your trustees and fill out some forms. If you already have a policy and you decide you want to put it in trust, you might need to pay for a solicitor or financial adviser to make sure your policy stays valid.

Because trusts are quite complex and can have long-standing implications, it’s always a good idea to get professional advice before you go ahead.

Life insurance and trusts - what to think about

There’s a lot to think about before you decide to write your life insurance in trust. It’s important to weigh up the potential downsides against the positives with your specific circumstances in mind.

You’ll also want to ask yourself questions like:

• What type of trust would suit my requirements?
• Who would my trustees be?
• Who would my beneficiaries be?
• What if my circumstances change - am I confident a trust will still meet my needs?

That depends. Writing life insurance in trust can be smart, especially if you’re not married or in a civil partnership, as otherwise a payout would become part of your estate and could be subject to IHT or used to pay off debts, for example.

A life insurance trust can be a useful way to:

• Speed up a payout as you don’t have to wait for probate
• Have more control over who gets to benefit from a payout, and how much
• Save on inheritance tax if your estate is over £325,000

But whether it’s right for you depends on your family and your particular circumstances. Putting life insurance in trust might not be worth it for you if:

• Your estate isn’t worth more than £325,000
• You’re leaving everything to your spouse or civil partner, so you don’t need to worry about inheritance tax
• Things in your life might change and you want to be flexible and potentially make changes to your policy and its beneficiaries

Choosing whether or not to put your life insurance in trust (and picking the right trust) isn’t necessarily a straightforward decision. It’s always best to speak to a financial adviser or legal professional to help you weigh up your options.