What if my life insurance payout goes to the wrong place?
Life Insurance in Trust: What It Means and Why People Do It
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- Last reviewed
- Reading time
- 2 min read
This guide provides general information only. It is not financial advice or a personal recommendation and does not take account of your individual circumstances.
Quick answer
Putting life insurance in trust means the payout goes to the people you choose, through trustees, rather than into your estate. That can mean the money is paid without waiting for probate, and in many cases it doesn't count towards your estate for Inheritance Tax. Insurers usually provide trust forms, but trusts have rules and tax consequences, so the details are worth understanding.
Key figures
- is the standard Inheritance Tax threshold
- £325,000
- Inheritance Tax rate on the part of an estate above the threshold
- 40%
- is where a policy in trust usually sits
- Outside the estate
What "in trust" means
A trust is a legal arrangement where trustees hold something for the benefit of other people, the beneficiaries. When a life policy is written in trust, the payout belongs to the trust rather than to you. When you die, the insurer pays the trustees, and they pass the money to the beneficiaries as the trust sets out.
Why people do it
- Speed. Money paid into a trust doesn't usually have to wait for probate, the legal process of dealing with an estate, which can take months.
- Control. You decide who benefits, and trusts can set conditions, for example holding money until a child reaches a certain age.
- Inheritance Tax. MoneyHelper explains that a trust can keep the policy's value out of your estate, so it may fall outside probate and Inheritance Tax.
Without a trust or a nominated beneficiary, MoneyHelper notes that the payout goes into your estate, which can take a long time and may be subject to Inheritance Tax.
How Inheritance Tax fits in
GOV.UK sets the standard Inheritance Tax threshold at £325,000. Tax is normally charged at 40% on the part of an estate above it, and the threshold can rise to £500,000 if you leave your home to your children or grandchildren. Anything left to a spouse or civil partner is normally exempt.
A large life payout landing in an estate can push it over the threshold. A policy written in trust usually doesn't count towards the estate's value, though the rules depend on the type of trust.
Joint policies and trusts
A joint policy pays once, on the first death, normally to the surviving policyholder. The same thinking applies to family income benefit, which pays a regular income rather than a lump sum. If the policy is in trust, the trustees and beneficiaries need to be set up so the survivor can still receive the money where that is the intention. See life insurance explained for joint and single policies.
Things to know before setting one up
- Many insurers provide standard trust forms, often free, at the start or later.
- Trusts can be hard to undo, and some types limit who can benefit.
- Choose trustees you trust, and usually more than one, so someone can act after your death.
- Some trusts have their own tax rules. GOV.UK explains that certain trusts can face charges when assets go in, on ten-year anniversaries or when money leaves. Life policies are often treated differently, but this is an area where legal or tax advice can help.
Questions to ask
- Who should receive the money, and should there be conditions?
- Who would act as trustees?
- What type of trust does the insurer's form create?
- Is the policy single or joint, and does the trust work for both?
- How would the payout fit with your will?
Frequently asked questions
It is commonly used so the payout reaches the right people quickly and may sit outside the estate for Inheritance Tax. Whether it suits depends on who you want to benefit, the type of policy and your wider estate.
In many cases a policy written in trust doesn't count towards the estate's value. The exact treatment depends on the type of trust, so check the trust terms.
Usually, yes. Many insurers let you put an existing policy into trust using their forms, often at no cost.
Without a trust or a nominated beneficiary, the payout normally goes into your estate, so it is distributed under your will or the intestacy rules after probate, and may count for Inheritance Tax.
Sources
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