Money Expert > Life Insurance > Writing life insurance in trust
Writing life insurance in trust
Get a a quote from a specialist to ensure your policy meets your needs.
Last updated: 15/01/2025 | Estimated Reading Time: 11 minutes
Money Expert > Life Insurance > Writing life insurance in trust
Get a a quote from a specialist to ensure your policy meets your needs.
Last updated: 15/01/2025 | Estimated Reading Time: 11 minutes
Life insurance can provide essential financial security for loved ones in the event of your death. However, the way in which your life insurance policy is structured can significantly affect the benefits your beneficiaries receive. One of the most important decisions when taking out a life insurance policy is whether to write it in trust. This comprehensive guide explains what it means to write life insurance in trust, how it works, the benefits, and the key considerations for UK policyholders.
Writing life insurance in trust refers to the legal process of setting up a trust for your life insurance policy, which allows you to legally assign the policy to a trust rather than to the beneficiaries directly. A trust is a legal arrangement where the policy’s benefits are managed by a trustee on behalf of the beneficiaries according to the terms of the trust. In simple terms, when you write a life insurance policy in trust, you are naming a trust as the policyholder and beneficiary rather than an individual person.
Writing your life insurance policy in trust means that, upon your death, the death benefit is not paid directly to your estate but instead to the trust. This ensures the proceeds are distributed according to your wishes, often providing quicker access to the funds and potential tax advantages.
When you write your life insurance policy in trust, you must designate the trustee (the person or entity responsible for managing the policy) and the beneficiaries (the individuals who will ultimately receive the death benefit). The policyholder (you) will still own the life insurance policy during your lifetime, but other beneficiaries of the trust will legally own the proceeds.
In the event of your death, the trustee will be responsible for managing the payout of the insurance benefit according to the terms of the trust agreement. This often involves distributing the full trusts life insurance proceeds to the beneficiaries without the funds passing through your estate.
The trust deed outlines the rules for how the trust operates, including:
Writing life insurance in trust offers several important benefits that can make it an attractive option for many policyholders. Here are the main reasons why writing life insurance in trust might be beneficial in the UK:
One of the most significant benefits of writing a life insurance policy in trust is the potential to avoid inheritance tax. Life insurance proceeds paid directly to your estate are considered part of your estate for inheritance tax purposes. This means they could be subject to inheritance tax if your estate exceeds the current nil rate band (the tax-free threshold).
By placing your life insurance policy in trust, the proceeds are excluded from your estate and are not counted toward the estate’s value for inheritance tax purposes. This can significantly reduce the inheritance tax liability and burden on your beneficiaries, ensuring they receive a larger share of the payout.
When life insurance is written in trust, the death benefit can be distributed much more quickly than if it were part of your estate. Life insurance proceeds paid to the estate must go through the probate process, which can take several months or even longer. Writing the life policy out in trust bypasses probate and enables the trustee to distribute the funds directly to the beneficiaries, often within a few weeks. This is particularly important in cases where your beneficiaries need immediate access to the funds (e.g., to cover funeral costs, outstanding debts, or living expenses).
Writing a life insurance policy in trust gives you control over how the proceeds are distributed. You have chosen trustees and can specify how and when the beneficiaries receive the funds, which can be particularly helpful if you want one or more trustees to manage the timing of payouts or protect vulnerable beneficiaries (such as young children, or those with addiction issues).
For example, you can structure the trust to:
Pay out in stages rather than a lump sum, providing ongoing support.
Hold funds in trust for beneficiaries until they reach a certain age or meet a specific condition.
Allocate the funds for a particular purpose, such as education or medical expenses.
This flexibility can ensure that the life insurance payout is used in line with personal circumstances and your wishes, rather than being misused or spent too quickly.
Protecting Against Creditors
In some cases, life insurance proceeds held in trust may be protected from creditors or claims against the deceased’s estate. For instance, if the life insurance policy is in trust, the death benefit may not be used to settle outstanding debts, as it doesn’t form part of the estate. This can be an important consideration if the policyholder is concerned about protecting their beneficiaries from any potential claims.
A bare trust is a simple trust where the beneficiaries have an absolute entitlement to the proceeds of the trust once they reach the age of 18 (or the age specified in the trust deed). This means that, upon your death, the trustee must pay the proceeds directly to the beneficiaries, and they can use the funds as they see fit.
Beneficiaries must be able to manage the funds responsibly, as they can access the money once they reach the specified age.
A discretionary trust gives the trustee the discretion to decide how and when the proceeds of the life insurance policy are distributed among the beneficiaries. The trustee can decide to allocate the funds to at least one beneficiary or more beneficiaries at their discretion, which allows for more flexibility, particularly if the beneficiaries' needs or circumstances change over time.
A split trust is a specialised type of trust that allows you to separate the benefits from life insurance and critical illness insurance policies. By writing these policies into separate trusts, you can manage the payouts and ensure that each benefit is distributed according to your specific intentions. This structure is particularly useful if you hold both life insurance and critical illness cover as part of your insurance portfolio and want to handle the proceeds from these policies differently.
A split trust allows you to assign the life insurance and critical illness benefits to different trusts, each with its own set of trustees and beneficiaries. For example, you could set up one trust for the life insurance payout, which may be intended to provide long-term financial support to your family, and another trust for the critical illness benefit, which could be used to cover immediate medical expenses or to provide a temporary income if you are unable to work due to illness.
Clear Separation of Funds: A split trust ensures that the benefits of life insurance and critical illness insurance are handled separately, with the funds being used for their designated purposes. This reduces the risk of confusion or misuse of funds, especially if the critical illness benefit is needed quickly for medical treatment.
Tailored Distribution: With separate trusts, you can specify different rules for distributing the benefits. For example, the life insurance trust might pay out over time or be used to cover ongoing financial obligations like a mortgage, while the critical illness trust could provide an immediate lump sum or periodic payments to cover healthcare costs or living expenses during recovery.
Flexibility: A split trust offers greater flexibility in how the proceeds are distributed and used, especially when there are different needs arising from life insurance and critical illness cover. For instance, you may want to provide your family with a guaranteed income through the life insurance policy while ensuring you can access immediate financial help from the critical illness cover.
By using a split trust, you can more effectively manage the different purposes of your life insurance and critical illness policies, ensuring that each set of benefits is used appropriately and according to your wishes.
Writing life insurance in trust is a relatively straightforward process in the UK. Here are the steps involved:
Choose the Type of Trust: Decide whether you want to use a bare trust or a discretionary trust, depending on how you want the funds to be distributed.
Select Trustees: Choose the individuals or organisations who will act as trustees. Trustees should be people you trust to manage the policy proceeds responsibly.
Name Beneficiaries: Determine who will be the beneficiaries of the life insurance policy. Beneficiaries can be family members, friends, or charitable organisations.
Complete the Trust Deed: A trust deed is a legal document that outlines how the policy proceeds should be handled. You will need to complete this document and ensure it complies with the requirements of UK law.
Notify the Insurer: Inform your life insurance provider that you want to write the policy in trust. The insurer will ask you to complete a trust nomination form. This form will ensure that the policy is legally assigned to the trust.
While writing life insurance in trust can provide many benefits, there are some important considerations to bear in mind:
Trustee Responsibilities: Trustees have a legal responsibility to manage the policy proceeds in the best interests of the beneficiaries. It’s important to choose trustees who are trustworthy and capable of fulfilling this role.
Inheritance Tax: While writing life insurance in trust can help reduce inheritance tax liabilities, it’s important to note that certain trusts may still be subject to inheritance tax in the future, particularly discretionary trusts. It’s worth consulting a tax professional or financial advisor to understand the implications.
Flexibility vs. Control: A discretionary trust offers more flexibility, but it also places more control in the hands of the trustee. Consider whether you want the flexibility to make changes or whether you prefer to have fixed instructions in place.
One common concern for policyholders considering writing their life insurance in trust is whether it will incur additional costs. In the UK, writing life insurance in trust is usually free. Most life insurance providers offer this service at no extra charge, as it is a relatively simple administrative process. The insurer may provide you with a trust nomination form that you can complete and return to have your policy written in trust.
However, if you choose to use a professional trustee service or consult a solicitor to seek legal advice and help draft a trust deed, there may be fees involved. The cost of setting up a discretionary trust, for example, could vary depending on the complexity of the trust and whether professional advice is needed.
Writing life insurance in trust is an effective strategy for ensuring your loved ones receive the proceeds from your life insurance policy in a timely and tax-efficient manner. It offers significant advantages in terms of avoiding inheritance tax, speeding up payouts, and maintaining control over how the funds are distributed.
By understanding the types of life insurance and trusts now available, the benefits, and the considerations involved, policyholders can make an informed decision about whether writing life insurance in trust is the right choice for their family’s financial future. Always seek advice from a professional advisor to ensure the process is carried out correctly and in line with all your assets and goals.