Life Insurance in Trust: How to Remove the Payout From Your Estate

Why Life Insurance Without a Trust Creates an IHT Problem

If you hold a life insurance policy and do not write it in trust, the payout on death is paid to your estate. It then forms part of the assets that HMRC assesses for IHT. If your estate exceeds the nil-rate band (£325,000 in 2025/26), the payout is taxed at 40% just like any other asset.

For a £500,000 life policy included in a taxable estate, the IHT on that payout alone could be up to £200,000 (£500,000 × 40%). Writing the policy in trust before death eliminates that liability entirely.

There is also a probate delay problem. Without a trust, the payout cannot be released until probate is granted — which can take months. Families often need funds quickly after a death to pay for the funeral, meet living costs, or pay the IHT itself (which must be paid to HMRC before probate is granted). A payout from a policy in trust can be made immediately by the trustees, without waiting for probate.

How Writing a Policy in Trust Works

When you write a policy in trust, you (the "settlor") transfer ownership of the policy to trustees. The trustees hold the policy and any proceeds on behalf of the beneficiaries you have named. On death, the insurer pays the payout directly to the trustees — not to your estate. Because the policy never forms part of your estate, there is no IHT on the payout.

Roles in the Trust

• Settlor: You — the person who takes out the policy and places it in trust
• Trustees: The people you appoint to manage the trust and distribute the proceeds. Often a spouse or partner plus one other trusted adult. You can be a trustee as well as settlor.
• Beneficiaries: The people who will receive the proceeds — typically your spouse, partner, children, or other family members

Types of Trust Used for Life Policies

The most common trust structures for life policies are:

• Bare trust: Fixed beneficiaries named at outset. Simple and irrevocable — once set up, the beneficiaries cannot be changed. Suitable where you are certain about who should receive the payout.
• Discretionary trust: Trustees have discretion over who among a class of beneficiaries receives the payout and in what proportions. More flexible — useful if your circumstances may change (divorce, death of a beneficiary). Subject to its own IHT regime (10-year periodic charges) — but on premiums paid, not the policy value, so often manageable for standard life policies.
• Flexible trust: A hybrid — a named default beneficiary but with flexibility to change. Many insurers' standard trust deeds are in this form.

How to Write a Policy in Trust

Most life insurers offer a trust deed as part of their policy application or as a free add-on to an existing policy. The process is typically:

1. Contact your insurer and request their trust documentation
2. Complete the trust deed, naming trustees and beneficiaries
3. All parties sign the deed — no solicitor strictly required, but advice is recommended for large policies
4. Return the signed deed to the insurer, who records the trust on the policy
5. Keep a copy of the trust deed in a safe place — trustees will need it to claim the proceeds

For an existing policy, writing it in trust is treated as a gift to the trust. If the policy has a surrender value at that point, the gift has a value for IHT purposes. For most term policies (which pay out only on death), there is no surrender value and no IHT consequence. Whole-of-life and investment-linked policies may have a surrender value — take advice before transferring these into trust.

What Type of Policy to Use

Whole-of-Life Policy

A whole-of-life policy pays out whenever death occurs — there is no fixed term. This makes it ideal for IHT planning, as you need the payout to cover IHT that arises on death regardless of when that happens. The premium is higher than term insurance but the payout is guaranteed. Written in trust, the payout provides an earmarked fund for the IHT liability.

Joint Life Second Death Policy

For married couples, a joint life second death policy pays out on the second death — when IHT typically first becomes due (due to the spouse exemption on first death). The premium is lower than two separate policies and the timing matches the point at which the IHT bill arises.

Term Insurance

A decreasing term policy can be used to cover the potential IHT on a large gift placed on the 7-year clock. The policy covers the IHT risk for 7 years and then lapses (when the gift becomes fully exempt). This is a cost-effective way to provide certainty for large PETs.

Premiums and IHT

Premium payments on a life policy written in trust are technically gifts to the trust each time they are paid. For most people:

• Premiums within the £3,000 annual gift exemption are immediately exempt
• Premiums that form part of a regular pattern of income expenditure may qualify under the normal expenditure out of income exemption
• Premiums exceeding these exemptions are PETs that become exempt if the donor survives 7 years

In practice, most life insurance premiums are modest enough to fall within the annual or normal expenditure exemptions, so this is rarely a problem.

Combining Insurance With Other IHT Planning

Life insurance in trust is most effective as part of a broader IHT planning strategy, not as a standalone solution. Consider combining it with:

• Gifting strategies to reduce the taxable estate
• Nil-rate band transfers between spouses
• Maximising the RNRB
• Charitable legacy to reduce the IHT rate to 36%

Related Guides

• Gifting Strategy 2025/26
• Normal Expenditure Out of Income
• Transferring the Nil Rate Band Between Spouses
• IHT on Discretionary Trusts
• The 7-Year Gifting Rule
• IHT Thresholds Frozen Until 2030
• IHT Planning Checklist 2025/26
• Inheritance Tax Basics
• Complete UK Inheritance Tax Guide 2026/27
• Get Started With Farra