Writing a life insurance policy in trust normally means the money is paid directly to the people you have chosen, without waiting for probate, and usually outside your estate for inheritance tax. Insurers provide the paperwork free. It takes one form, and most people never complete it.
What happens without a trust
If a policy is not in trust, the payout is generally made to your estate.
Two consequences follow.
It waits for probate. Before your estate can distribute anything, the executors normally need a grant of probate. That routinely takes months. During that period the money exists but cannot be released — which is precisely when a family may be trying to keep up mortgage payments.
It counts towards inheritance tax. Money paid into the estate forms part of it. Depending on the size of your estate and the allowances applying at the time, a proportion of a payout intended for your family could go in tax instead.
What changes with a trust
The policy no longer belongs to you. It is held by trustees for the benefit of the people you name.
The money is paid to the trustees directly, on production of the death certificate, without waiting for probate. In practice that is weeks rather than months.
It normally sits outside your estate for inheritance tax purposes.
You choose who benefits, and that stands regardless of what a will says or does not say. For unmarried partners this is particularly important — without a trust or a valid will, an unmarried partner may have no automatic entitlement at all.
How to do it
Ask your insurer for their trust form. Every major provider has one and there is no charge.
You will need:
Trustees. The people who will manage the payout and distribute it. You are usually a trustee yourself, and you should appoint at least one other — commonly a spouse, adult child or trusted friend. Choose people who would act sensibly and who you can rely on to be contactable.
Beneficiaries. Who the money is for. This can be specific people, or a class such as "my children".
The type of trust. Most insurers offer a simple choice. A flexible trust lets trustees vary who benefits within a defined group, which suits changing family circumstances. An absolute or bare trust fixes the beneficiaries permanently and cannot be changed — simpler, but inflexible.
Complete the form, sign it with witnesses as instructed, and return it. Keep a copy and tell your trustees the policy exists and where the paperwork is. A trust nobody knows about is not much use.
Do it at the outset if you can
A policy can be placed in trust at any time, but doing it when the policy is set up is simplest.
Placing an existing policy into trust later is normally straightforward, though there can be tax considerations for policies of significant value. Worth a conversation with a solicitor if the sums are large.
When a trust may not be right
Not automatic in every case:
If the policy is specifically to repay a mortgage and the property is jointly owned, the mortgage still needs clearing. This usually still works well in trust, but the arrangement should be thought through.
Business protection policies — key person cover, shareholder protection — use different arrangements suited to their purpose.
Complex family circumstances — second marriages, estranged relatives, beneficiaries who are minors or vulnerable — deserve proper legal advice rather than a standard form.
Where our role ends
We can tell you whether a trust is likely appropriate, and we routinely help clients complete an insurer's standard trust form as part of arranging cover.
Trusts are a legal arrangement. For anything beyond the insurer's standard form — particularly larger estates, second families, or where inheritance tax planning is the main purpose — take advice from a solicitor. We are mortgage and protection advisers, not estate planners, and we will say so rather than guess.
If you already have cover
Check whether it is in trust. Many people do not know.
Ask your insurer. If it is not, ask for the form. It costs nothing, takes one afternoon, and it is the difference between your family receiving the money in weeks or waiting months for probate.
Call 0116 277 7536 or see income protection insurance in Leicester.
More guides: protection guides for Leicester.
