The case for putting life insurance policies in trust

The case for putting life insurance policies in trust

Life insurance isn’t for you, it’s for those you leave behind.  The saying may be old, but it is still true.  Given that the whole purpose of life insurance is to take care of the people you love when you are no longer around to do so, surely it makes sense to complete the process by ensuring that your loved ones can access the funds you’ve prepared for them as quickly and easily as possible.

You want to avoid life insurance being treated as part of your estate

Even in a best-case scenario, winding up an estate can take time and while it is possible to withdraw some funds for allowable expenses, you cannot just use an estate’s funds as you see fit, at least not until probate has been completed, all debts and other claims have been settled and HMRC has had his share.  Rules around taxation can and do change, so for the purposes of this article, let’s just say that anyone who owns a home is a likely candidate for inheritance tax and the greater the value of your home, the more likely it is that your estate will be subject to taxation.  Having a life insurance policy added to the value of your estate on top of everything else simply increases your exposure to tax liability.  As a final point, while this is sad to say, wills are not guaranteed to be processed smoothly and equitably.  They can be subject to family politics and legal challenge and, in a worst-case scenario, you may find that your estate winds up being divided in a way which was rather different from what you had intended.

Writing a life insurance policy into a trust deals with both of these issues

Writing a life insurance policy into a trust means that it is treated entirely separately from your estate, which means it can be released to its intended recipients promptly, possibly long before probate is anywhere near completed, so they can use it as they wish to help them get on with their lives.  By separating the proceeds of the life insurance policy from your estate, you may be able to keep the overall value of your estate below the inheritance tax threshold and, if not, at the very least you will be minimizing your tax liability.  Furthermore, by keeping the life insurance policy separate from your main estate you protect the recipients from coming on the wrong end of legal challenges to your will.

Trusts also offer control over how the money is used

While trusts can offer the beneficiaries complete flexibility over how they use the money, they also offer trustees the option to continue to exercise control over how the money is used.  This may not be appropriate for an adult but could be very appropriate for a minor child and possibly even for a young adult as well.  For example, it could mean that instead of them receiving the full sum upon your death, they could be allowed access to it for specific, approved purposes, such as education and given full control over the money at a time when they are mentally and emotionally ready to handle it.

Trusts need to be set up with care

There are two reasons why trusts need to be set up with care.  The first is so that they are entirely legal and do not fall foul of HMRC and the second is so that they achieve their aim.  For example, if you are setting up a trust for a minor child, you will need to think very carefully about what sort of situations could arise between their minority and their full adulthood and make sure that the trust can deal with them.  It can therefore be very useful to get professional advice when setting up a trust.

Trusts and Inheritance Tax planning are not regulated by the Financial Conduct Authority.

Tax treatment varies according to individual circumstances and is subject to change.


If you have any questions please contact your local Charles Derby Financial Adviser today on 0800 849 1279 or email This email address is being protected from spambots. You need JavaScript enabled to view it.