Putting life insurance in trust

What is a trust? 

A trust is a legal arrangement where you leave assets to your beneficiaries. You appoint trustees to manage your trust. They can be friends, family members, or legal professionals (which will incur a cost). Your trustee may have the power to manage the payout to your beneficiaries – whether it’s when you pass away or on a specified date afterwards.

You can put your life insurance policy into a trust. This is also referred to as ‘writing life insurance in trust’. Doing so will mean that the value of your policy is not considered part of your estate (assets and property).

It's a good idea to write a letter of wishes, to go alongside your trust, which is a non-binding way of letting the trustees know who you would like the policy proceeds to benefit.

How life insurance in trust works

There are different types of life insurance trusts. Understanding what they are can help determine which works best for your beneficiaries.

Discretionary trusts

Discretionary trusts give your trustee full control over distrubuting the money to the beneficiaries named. They decide how much each beneficiary receives, and when. Your trustee can follow your letter of wishes as a guide.

Flexible trusts

Flexible trusts involve a default beneficiary and a discretionary beneficiary. Default beneficiaries are entitled to any income from the trust, but discretionary beneficiaries can only receive the trust income if the trustee allows it. The proceeds are also held for the default beneficiaries, unless the trustees choose to select from the discretionary beneficiaries instead.

Survivor’s discretionary trust

A survivor’s discretionary trust, is designed solely for placing a joint life insurance policy in trust. If you die before your partner, they inherit your policy before your beneficiaries. If both policy owners die within 30 days of one another, then your beneficiaries will receive the payout.

Absolute trusts

In absolute trusts, your beneficiaries can’t be changed in the future. That includes any children born later and a spouse following a divorce. It's the least flexible life insurance trust.

It may be beneficial to involve a legal advisor or solicitor to get the wording of a trust policy right. It’s the trustee’s responsibility to keep the trust deed safe once it’s set up. Trustees must use it to claim to the insurer when you die, so they will need it then.

Who can be a beneficiary of a life insurance trust?

It’s your choice to name the beneficiaries of a trust. You could choose the following:

Spouse or civil partner

• Children
• Relatives
• Friends
• Charities

If you’re in a civil partnership or living together without being married, it can be beneficial to put your life insurance in trust. That way, your partner can receive the payout in the event of your death – rather than the estate.