Putting policies in trust

Free, takes one form, and most people never do it. Here's what it changes.

A life insurance policy that isn't written in trust pays into your estate. That single fact causes three problems, all of which are avoidable at no cost.

The three problems

Delay. Money paid into your estate generally can't be released until probate is granted. That routinely takes months. Meanwhile the mortgage payments the policy was meant to cover are still due, and your family has no access to the money.

Inheritance tax. A policy paying into your estate increases its value. If the estate is above the available nil rate bands, 40% of the payout may go in tax. A £300,000 policy can become £180,000.

Loss of control. The money follows your will, or the intestacy rules if you don't have one. That may not match your intentions — particularly for unmarried partners, who inherit nothing under intestacy however long you've been together.

What a trust does

Writing the policy in trust means it's no longer yours. It's held by trustees for the benefit of the people you name.

Payment is fast — trustees can usually claim on production of a death certificate, without waiting for probate. Weeks rather than months.

It's generally outside your estate for inheritance tax, so the full amount reaches your family.

You choose who benefits, independently of your will.

It's protected from creditors of your estate in most circumstances.

What it costs

Nothing. Insurers provide standard trust forms free, and completing one at the point of application takes minutes. Doing it later is also free, just slightly more admin.

There is no good reason not to do this for a policy intended to benefit your family, and the reason it doesn't happen is simply that nobody mentions it.

The two main types

Discretionary trust. Trustees have discretion over which of a class of potential beneficiaries receives what. You guide them with a letter of wishes, which isn't binding but is normally followed.

Flexible, because it copes with circumstances changing — a new child, a divorce, a beneficiary who shouldn't receive a large sum outright. It's the usual choice for family protection.

Bare or absolute trust. The beneficiaries are fixed at the outset and can't be changed. Simpler, and it can suit a specific purpose, but it's inflexible — a named beneficiary who later becomes an ex-partner stays named.

Split trusts are used where a policy includes critical illness cover: the critical illness element is retained by you, since you'd want that money yourself, while the life cover is held in trust for your family.

Choosing trustees

Trustees claim and distribute the money. Choose people who'll act promptly and sensibly.

You're normally a trustee yourself, and you should appoint at least one other — otherwise, on your death, there may be no trustee able to act, which defeats the purpose.

Your spouse or partner is the usual choice, ideally with a second trustee in case you die together. Adult children, siblings or a trusted friend also work. It's a practical role, not a technical one.

When not to bother

Mortgage cover where the mortgage is in joint names and the survivor simply needs the debt cleared — though a trust often still helps with speed.

Policies already assigned to a lender, which some older mortgage arrangements involve.

Where the payout is genuinely intended to go through the estate, for example to fund legacies under a will.

For most family protection, though, the trust is right and the default of not bothering is wrong.

Existing policies

You can put an existing policy into trust at any time, and it's worth working through what you already hold. Two things to check while you're at it: whether the beneficiaries still reflect your wishes, and whether your pension expression of wish forms are current — a separate but closely related piece of admin, covered in What happens to what's left.

The wider estate picture

Trusts for protection policies are the simple end of a large subject. Where a policy is being used specifically to fund an expected inheritance tax bill, that's covered in the Inheritance and estate planning topic, particularly Insuring the bill.

This article is for general education only and isn't personal advice. Trusts have legal and tax consequences and the right type depends on your circumstances — worth taking advice where the sums are significant or the family situation is complicated.