What does it mean to put life insurance in trust?

Putting life insurance in trust means transferring legal ownership of the policy to your appointed trustees. This arrangement ensures that the payout from your life insurance isn’t considered part of your estate when you pass away, so it typically won’t be subject to inheritance tax.

Your estate includes everything you own—such as property, savings, investments, and personal belongings—minus any debts. It can also include the payout from a life insurance policy. If the total value of your estate exceeds the current £325,000 inheritance tax threshold, anything above that amount could be taxed at 40% upon your death.

By placing your policy in trust, your trustees take responsibility for managing it and ensuring the money is passed on to your chosen beneficiaries—whether that’s your children, other family members, friends, or even a charity.

Another key benefit is that the payout doesn’t have to go through probate, which means your beneficiaries could receive the money more quickly—and without the burden of inheritance tax.

What is a trust?

A trust is a legal arrangement that allows you to pass on assets—such as money, property, or investments—to your chosen beneficiaries, like family members or loved ones.

When an asset is placed ‘in trust’, it’s managed by one or more appointed trustees until it’s passed on to the beneficiary or beneficiaries. In the case of life insurance placed in trust, the payout might be released when you pass away or at a specified time—for instance, when a child or grandchild turns 18.

Trustees can be friends, relatives, professionals, or companies. The person who creates the trust is known as the ‘settlor’ and legally transfers ownership of the asset to the trustees. These trustees are legally obligated to manage the trust in line with the settlor’s instructions and always act in the best interests of the beneficiaries. This legal responsibility is known as their fiduciary duty.

Is it worth placing my life insurance in trust?

It can be a smart move—especially if the total value of your assets, savings, and investments is likely to exceed the inheritance tax (IHT) threshold. In that case, placing your life insurance in trust could help ensure the full payout goes to your loved ones, rather than being reduced by a 40% tax charge.

Setting up a trust is also a sensible option if you want to leave the payout to children, grandchildren, or other minors. Since beneficiaries under 18 can’t legally receive the money until they come of age, a trust allows you to choose when the funds are released—such as when they turn 18 or 21. Until then, your appointed trustee will manage the money on their behalf.

Keep in mind that anything you leave to your spouse or civil partner is generally exempt from inheritance tax. Additionally, any unused portion of your tax-free IHT allowance (also known as the nil-rate band) can potentially be transferred to your partner when you pass away. This means that if you leave everything to your surviving spouse or civil partner, they may be able to pass on up to £650,000 tax-free to your beneficiaries. However, if you leave part of your estate to someone else, it could reduce the transferable amount. For more detailed examples, visit GOV.UK.

You may also be eligible for an increased inheritance tax-free allowance of up to £500,000 per person if you leave your home to your children or grandchildren—provided your total estate is valued under £2 million.

Even if your estate doesn’t exceed the standard tax-free threshold, placing your life insurance policy in trust can still be beneficial. It allows the payout to bypass probate, meaning your loved ones could receive the funds more quickly—helping cover urgent expenses like funeral costs.

How to place life insurance in trust

When you take out a life insurance policy, many providers offer the option to ‘write your policy in trust’—often at no extra cost. However, before setting up a trust, it’s a good idea to seek legal advice to ensure it aligns with your wishes. Trusts can be difficult to change once they’re in place, so it’s important to get it right from the start.

You can also place an existing life insurance policy in trust, but it’s best to consult a solicitor or financial adviser to avoid any risk of invalidating the policy or triggering tax complications.

Choosing the right trustees is essential. You’ll need at least two individuals who are over 18 and financially responsible—typically a trusted family member or close friend.

The trust deed, which outlines the terms of the arrangement, must be reviewed and signed by all parties involved. Once the policy is in trust, control passes to the trustees, not you. You’re effectively giving up ownership of the policy, which is why it won’t be counted as part of your estate.

What are the different types of life insurance trusts?

There are several main types of life insurance trusts, including:

• Absolute or ‘bare’ trusts – These are typically fixed trusts, meaning once they’re set up, you generally can’t change the beneficiaries or how the trust is divided. If a beneficiary is still a child when you pass away, the trustees will manage their portion until they reach the age of 18 (or 16 in Scotland). After that, the beneficiary gains full control of their share.
• Discretionary trusts – These offer greater flexibility but give more decision-making power to the trustees. When setting up a discretionary trust, you don’t need to specify right away who the beneficiaries are, how much they’ll receive, or when they’ll get it. You can typically add more trustees later if needed.

The trustees have the freedom to decide how the payout is distributed, including who receives what and when. Unlike a bare trust—where a child beneficiary automatically receives their share at 18—the trustees of a discretionary trust can choose to delay payment until the child is older.

You can also include a ‘letter of wishes’ to guide the trustees in how you’d like the money to be distributed, though they aren’t legally bound to follow it.

• Flexible trusts – These are similar to discretionary trusts but require you to name at least one ‘default’ beneficiary. This person is set to receive the full life insurance payout unless the trustees decide to distribute some or all of it to one or more ‘discretionary’ beneficiaries instead.
• Split trusts – If your life insurance policy includes critical illness cover, a split trust allows you to separate the two benefits. This means you can still receive the critical illness payout during your lifetime, while the life insurance payout is held in trust and passed on to your beneficiaries after your death.
• Survivor’s discretionary trust – This type of joint life insurance trust is especially useful for unmarried couples. If one partner dies, the surviving policyholder is first in line to receive the payout before it’s passed to any other named beneficiaries. However, if both partners die within 30 days of each other, the payout is distributed to the remaining beneficiaries, following the rules of a discretionary trust.

What are the benefits of placing life insurance in trust?

Setting up a trust for your life insurance policy can offer several key advantages:

• Faster access to funds – The payout can be made without waiting for probate, which is the legal process of valuing and distributing your estate after death. Probate can take months—or longer if complications arise—so a trust can help speed things up for your beneficiaries.
• Inheritance tax protection – The life insurance payout is generally excluded from your estate, so it won’t count toward inheritance tax calculations.
• More control over distribution – You can decide when your beneficiaries receive the money, such as once they reach a certain age.
• Shielded from debts – The payout is usually protected from being used to settle any outstanding debts you leave behind.
• Often no additional cost – Many insurers include the option to set up a trust at no extra charge and provide template forms to help you get started.

What are the drawbacks of putting life insurance in trust?

The main downside is that trusts can be difficult to change once they’re in place. After you’ve placed a policy in trust, it typically can’t be removed. While some amendments may be possible, they can be risky—there have been cases where people unintentionally invalidated their life insurance by altering a policy held in trust. That’s why it’s important to seek legal advice before making any changes or setting up a trust in the first place.

There may also be tax implications. For example, if you change the beneficiary of a life insurance policy held in trust and then pass away within seven years, inheritance tax could be charged. This usually applies when the new beneficiary isn’t your spouse or civil partner. The potential tax liability reduces if you live more than three years after the change, and disappears completely after seven years.

Who can you name as a beneficiary of your life insurance?

You have full flexibility when it comes to choosing who receives your life insurance payout. The only requirement is that you name at least one beneficiary—and unfortunately, pets like your cat or dog aren’t eligible.

Some common options include:

• Your spouse or partner
• Your children, stepchildren, or grandchildren
• Other family members, whether close or distant
• Friends or a group of close friends
• A charity or organisation that matters to you

Trustees of your life insurance policy can also be named as beneficiaries, as long as they’re over 18 and have the mental capacity to manage the responsibility. You can divide the payout however you wish—splitting it between multiple people or groups in any proportion that suits you.

If you name a child or another minor as a beneficiary, you’ll need to set up the policy in trust or appoint a legal guardian to manage the funds until they reach adulthood (age 18 in most of the UK, or 16 in Scotland).

Lastly, it’s a smart move to let your beneficiaries know about the policy, so they’re aware and prepared to make a claim when the time comes.

Can you put a joint life insurance policy in trust?

Yes, a joint life insurance policy can be placed in trust, but it’s not commonly done. That’s because joint policies are often taken out by married couples or civil partners, and assets passed between them are usually exempt from inheritance tax. However, if you’re in an unmarried relationship, setting up a trust for a joint policy can be a smart way to ensure the payout goes directly to your partner and potentially avoid inheritance tax.

How does placing life insurance in trust work for cohabiting couples?

Unlike married couples or civil partners, cohabiting partners aren’t automatically exempt from inheritance tax. If you want to ensure your partner is financially protected after your death, writing your life insurance policy in trust and naming them as the beneficiary can be a smart move.

This setup keeps the payout separate from your estate, meaning it won’t be subject to inheritance tax or delayed by the probate process. As a result, your partner can receive the full amount you intended for them—without tax deductions and usually much sooner.

If you haven’t placed your policy in trust but have still named your cohabiting partner as a beneficiary, they should still receive their portion of the payout. However, it will be considered part of your estate, meaning they may have to wait for probate to be completed, and the payout could be reduced by inheritance tax if your estate exceeds the £325,000 tax-free threshold.

What else should I keep in mind when placing life insurance in trust?

There are a few additional considerations to think about when putting a life insurance policy in trust. For a deeper understanding, you can explore our guide on how tax and life insurance work. And if you’re unsure about any aspect of the process, it’s always wise to consult a specialist adviser who can offer tailored advice based on your situation.

Frequently Asked Questions About Inheritance Tax Planning