Putting Life Insurance In Trust
Most people arrange life cover and never hear the word trust, which is why a lot of policies are not in one.
The decision has nothing to do with how much cover you buy or what it costs. It is about where the money lands when it pays out, and that turns out to matter quite a lot to the people waiting for it.
It is usually a form completed alongside the application. Doing it at the start is straightforward. Doing it years later is possible but more involved, and doing it never is the default.
The short answer
Writing a life policy in trust changes the route the money takes rather than the amount. The payout goes to the people you named rather than into your estate, which normally means it is not held up by probate and is normally outside the estate for inheritance tax. Setting it up usually costs nothing at the point the policy is arranged, which is why it is worth deciding at the start rather than later.
What this changes
- The payout goes to the people named in the trust rather than into your estate
- Because it is not part of the estate, it is normally not held up waiting for probate
- The policy proceeds are normally outside your estate for inheritance tax purposes
- You decide who benefits, rather than it following your will or the intestacy rules
- The money is kept separate from anything your estate might owe
- Trustees are responsible for passing it on, so you are choosing who handles it
The bit people miss
Probate is the part nobody anticipates. If a policy is not in trust, the payout generally goes into the estate, and the estate usually cannot be distributed until probate is granted. That process commonly takes months rather than weeks. So a family can be in the position of having a substantial sum legally theirs but not yet accessible, while the mortgage payments and the bills carry on arriving on schedule. A policy in trust normally bypasses that, and the money can reach people when they need it rather than when the paperwork clears.
Who Actually Gets It, And Who Decides
Without a trust, a life insurance payout generally forms part of your estate and is then distributed according to your will, or according to the intestacy rules if there is no will.
That is fine when the will says what you want it to say and everybody involved agrees. It is less fine in the situations people do not plan for. An unmarried partner has no automatic entitlement under the intestacy rules. Children from an earlier relationship may be treated differently from how you intended. An out of date will can direct money somewhere you would not now choose.
A trust sidesteps all of that by naming the beneficiaries on the policy itself. It is a separate instrument from your will and it does not depend on your will being current, which is why the two are worth looking at together rather than assuming one covers the other.
It Is Usually Free, And It Is Usually Reversible Enough
The practical objection people raise is that a trust sounds expensive and permanent. Neither is normally true at the point a policy is being arranged.
Insurers generally provide their own trust forms and there is normally no charge for completing one alongside the application. It is paperwork rather than a legal project, and we deal with it as part of setting the policy up.
Flexible trusts, which are the common choice for family protection, let you name beneficiaries and generally allow those to be changed later as circumstances change. The specifics depend on the trust and the insurer, and there are situations where a trust is genuinely not the right answer, so this is something to go through properly rather than tick. What we would say is that it is worth a five minute conversation at the application stage, because it is far easier to do then than to retrofit.
What usually fits, and why
The policy most often written in trust, and the one where it makes the biggest difference, because the payout is a single large sum arriving at the worst moment for a family to be waiting.
Usually handled differently, because the point of this cover is that it pays out to you while you are alive. Whether a trust makes sense depends on how the policy is set up, which is worth asking about rather than assuming.
Normally written in trust as standard, because it is a company-paid policy that has to pay to the employee's family rather than to the business.
Common questions
What does putting life insurance in trust actually do?+
It changes where the money goes. Instead of the payout forming part of your estate, it goes to the people named in the trust. That normally means it is not delayed by probate and is normally outside your estate for inheritance tax. The amount of cover and the premium are unaffected.
Does it cost anything?+
Normally not when it is done at the same time as arranging the policy. Insurers generally provide their own trust forms and completing one is part of the application process. Setting up a trust years after the policy started can be more involved, which is the argument for deciding at the outset.
How long does probate take if a policy is not in trust?+
It varies, but months rather than weeks is common. The practical consequence is that a family can have a large sum that is legally theirs but not yet accessible, while the mortgage and bills carry on. That delay is the main thing a trust is avoiding.
Can I change who benefits later?+
With a flexible trust, which is the usual choice for family protection, you can generally name beneficiaries and change them later as things change. The exact position depends on the trust and the insurer, so it is worth confirming for the specific policy rather than relying on a general answer.
Do I still need a will if my policy is in trust?+
Yes. A trust only deals with that policy. Everything else you own, including the house, savings and possessions, is dealt with by your will or by the intestacy rules if you do not have one. They do different jobs and most people need both.
Is a trust always the right answer?+
No, and anybody saying otherwise is overselling it. There are situations where it does not suit, including some business arrangements and some family circumstances. It is worth going through your own position rather than treating it as a default, which is part of what we do when arranging the cover.
Cover that often goes with this
The gaps we most often find sitting next to this one.