What Does Writing a Policy in Trust Mean?
When you write a life insurance policy in trust, you transfer legal ownership of the policy to a set of trustees. The trustees hold the policy on behalf of your chosen beneficiaries (typically your spouse, partner, or children). When you die, the payout goes directly to the trustees, who distribute it to the beneficiaries.
Crucially, because the policy is owned by the trust and not by you, the payout does not form part of your estate. This has two major benefits: it avoids inheritance tax (IHT) and bypasses the probate process.
Why Write Your Policy in Trust?
1. Avoid Inheritance Tax
If your life insurance payout forms part of your estate and pushes the total above the IHT threshold, your beneficiaries could lose up to 40% of the payout to tax. For a £300,000 policy, that could mean £120,000 going to HMRC instead of your family.
A trust removes the payout from your estate entirely, so IHT does not apply regardless of the size of your estate or the payout.
2. Faster Payout
Without a trust, the payout becomes part of your estate and cannot be distributed until probate is granted. Probate can take three to six months or longer. With a trust, the insurer can pay the trustees directly, often within five to ten working days.
3. You Choose Who Gets the Money
A trust lets you specify exactly who benefits. This can be especially important in blended families, if you are unmarried, or if you want to provide for specific people (such as children from a previous relationship).
Types of Trust
| Trust Type | How It Works | Best For |
|---|---|---|
| Flexible (discretionary) | Trustees decide how to distribute | Most people – maximum flexibility |
| Absolute | Fixed beneficiaries who cannot be changed | When you are certain of beneficiaries |
| Split | Critical illness payout to you, death payout to family | Policies with CIC add-on |
Most insurers recommend the flexible (discretionary) trust as it gives trustees the widest powers to adapt to changing family circumstances.
How to Put Your Policy in Trust
- At application – Most insurers offer a trust option as part of the online application. You simply tick a box and name your trustees and beneficiaries. This is the easiest approach.
- After purchase – If you already have a policy, contact your insurer and request a trust form. Complete it, sign it with your trustees, and return it. There is no cost.
- Via a solicitor – For complex estates or specific requirements, a solicitor can draft a bespoke trust deed. This may incur legal fees.
Who Should Be Your Trustees?
You need at least two trustees (you can be one of them). Common choices include your spouse/partner, a close family member, a trusted friend, or a solicitor. The trustees’ role is to receive and distribute the payout according to your wishes.
Choose people you trust completely and who are likely to be available when needed. It is wise to name backup trustees in case your primary trustees are unable to act.
Frequently Asked Questions
It means transferring ownership of your life insurance policy to a trust. When you die, the payout goes to the trust rather than your estate. This avoids inheritance tax and speeds up payment to your beneficiaries.
No. Most UK insurers offer trust arrangements completely free of charge. You can set it up when you buy the policy or at any time afterwards.
With a flexible or discretionary trust, yes. Trustees can change beneficiaries at any time. With an absolute trust, beneficiaries are fixed and cannot be changed once established.
The payout forms part of your estate. It may be subject to 40% inheritance tax if your estate exceeds the threshold, and your family will have to wait for probate before receiving the money, which can take months.