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.
Putting life insurance in trust – pros and cons
There are some benefits and drawbacks of life insurance written in trust.
Advantages of putting life insurance in trust
Putting life insurance in trust is a popular option for many reasons. Let’s explore some ways you can benefit from a life insurance in trust.
Control over your assets
Putting your life policy in trust means you can appoint your trustees. This gives you greater control over who administers your payout, and when. If you’re in a civil partnership, you’ll have peace of mind knowing that your assets go to the intended beneficiaries.
Faster access to your money
With a life insurance trust, the trustees can distribute the proceeds of the policy before the beneficiaries apply for probate, which can take several months to complete. In some cases, they could receive the inheritance within a couple of weeks of the death certificate being issued.
Protects beneficiaries from Inheritance Tax
Life insurance written in trust isn’t generally considered part of your estate. This can help to manage any future Inheritance Tax liability on the life insurance payout.
Disadvantages of putting life insurance in trust
Putting life insurance in trust can be worth it, but there are also some potential downsides. Here are some disadvantages to consider for life insurance trusts.
Irreversible decision
Life insurance written in trust is an irrevocable decision. Once you put your life insurance in trust, you can’t cancel the trust.
You lose some control
Your life insurance trust gives full control to your trustee, alongside yourself. Once it’s set up, your appointed trustee must sign off any decision with you.
How long does a trust last?
A life insurance trust can last up to 125 years, but it depends on your circumstances and the trust’s purpose. For example, the length of a trust could last until a child grows up and marries. Similarly, there is no expiry date for life insurance trusts set up for charities.
Need more information about life insurance?
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