Putting your life insurance in trust is a straightforward process that can save your loved ones time, money, and stress when they need financial support most.
Putting your life insurance in trust is a straightforward process that can save your loved ones time, money, and stress when they need financial support most.
What does putting life insurance in trust mean?
When you put life insurance in trust, you're legally transferring ownership of the policy to trustees who will manage it for your beneficiaries. You keep paying the premiums, but the policy itself no longer belongs to you, which means it sits outside your estate. This distinction matters for two reasons: anything in your estate must go through probate before your family can access it (which can take three to six months), and if your total estate exceeds £325,000, everything above that amount is taxed at 40%.
Most people choose a simple bare trust, where the payout goes directly to named beneficiaries. You can also select a discretionary trust, which gives trustees flexibility to decide how and when to distribute the money.
Pros and cons of putting life insurance in trust
In addition to those benefits, another advantage is that set-up costs are usually zero, as most insurers provide trust services free of charge. However, there are drawbacks to consider.
Once the policy is in trust, you no longer own it and can't cash it in or borrow against it during your lifetime. If the people you're leaving money to rely on benefits that depend on their income or savings, a large payout could affect their eligibility. You'll also need to keep the paperwork updated whenever your family situation changes, such as getting married, divorced, or having more children. If your estate is comfortably below the inheritance tax threshold, or you only have a small policy, setting up a trust might be more hassle than it's worth.
Is it worth putting life insurance in trust?
For most policyholders with estates approaching or exceeding the £325,000 threshold, the inheritance tax savings and faster payout typically outweigh the loss of flexibility. The potential to save 40% of your policy value for your beneficiaries represents significant financial protection. Even if you need legal help to establish a more complex trust arrangement, the savings often justify the expense.
That said, your individual circumstances matter. If maintaining access to your policy's cash value is important for your financial security, or if your beneficiaries' benefit eligibility could be jeopardised, you should weigh these factors carefully against the potential advantages.
Managing your trust
Once your life insurance is in trust, review your arrangement every few years. Keep your trust documentation somewhere safe and make sure your trustees know where to find it.
The advisers at LDB Wealth, based in Weybridge and Dartford but helping clients throughout the UK since 2014, can help you understand whether putting your life insurance in trust aligns with your estate planning goals.
Trusts, inheritance Tax and Estate planning is not regulated by the Financial Conduct Authority.
Tax treatment varies according to individual circumstances and is subject to change.
