Life insurance is meant to provide financial support for your family when you die. But if the payout is treated as part of your estate, it can push the total value over the Inheritance Tax (IHT) threshold — meaning up to 40% of the very money meant to protect your family could be lost to tax instead. Writing the policy "in trust" is a widely used, low-cost way to avoid this.
What "in trust" actually means
When you write a life insurance policy in trust, you're legally separating the policy from your personal estate. Instead of the payout going to you (or your estate) on death, it goes directly to a trust, which then pays out to the beneficiaries you've named — usually your spouse, children, or another dependant. Because the money never legally forms part of your estate, it typically falls outside the calculation for IHT purposes.
Why this matters beyond tax
- Speed: Money paid into a trust can usually reach beneficiaries much faster than an estate that has to go through probate, which can take months
- Control: You choose the trustees and can specify how and when funds are used — useful if beneficiaries are children or vulnerable adults
- Certainty: The payout goes exactly where you intend, rather than being distributed according to your will (or intestacy rules if you don't have one) and being exposed to any claims against your estate
How the process works
Most UK life insurers offer a trust form free of charge alongside the policy — often a simple "discretionary trust" or "split trust" for policies that combine life and critical illness cover. The typical steps are:
- Take out the life insurance policy
- Complete the insurer's trust document, naming trustees (people you trust to manage the payout) and beneficiaries
- Sign and date the trust deed — ideally witnessed as instructed by the insurer
- Return it to the insurer, who registers the policy as held in trust
Many people do this themselves using the insurer's standard forms at no extra cost, though more complex family situations (blended families, business protection policies, or very large sums assured) may benefit from a solicitor drafting a bespoke trust.
A simple comparison
| Policy not in trust | Policy in trust | |
|---|---|---|
| Payout destination | Estate, then distributed via will/probate | Trustees, then directly to named beneficiaries |
| Counts toward IHT estate | Usually yes | Usually no |
| Speed of payment | Delayed by probate | Typically much faster |
| Cost to set up | N/A | Often free with the insurer's standard trust |
Common mistakes
- Taking out life insurance and never getting around to writing it in trust — this is the single biggest missed opportunity, since the trust must generally be set up when the policy starts (or soon after) to avoid its own IHT complications
- Naming trustees who are also the sole beneficiaries without a backup, or failing to update trustees after a divorce or bereavement
- Assuming a trust is only for the wealthy — it's relevant to almost anyone with life cover and an estate that could otherwise attract IHT
What to do next
If you already have life insurance and it isn't written in trust, contact your insurer — many allow you to add a trust retrospectively using a standard form, at no cost. If you're taking out new cover, ask about writing it in trust as part of the application rather than treating it as an optional extra.