Writing your life insurance in trust takes about 20 minutes, costs nothing, and could save your family tens of thousands of pounds in Inheritance Tax. Yet most people never do it. Here is the complete guide — including which trust type to choose and exactly how to do it in 2026/27.
Why Trust Placement Matters So Much
If your life insurance policy is not in trust, the payout on death goes to your estate. From there:
- It is included in the estate value for Inheritance Tax
- It must go through probate before your family can access it (often taking 6–12 months)
- IHT at 40% applies on the amount above your nil-rate band (£325,000 in 2026/27)
If your life insurance policy is in trust:
- The payout goes directly to the trustees — bypassing your estate entirely
- No IHT applies
- No probate required — trustees receive the payout and distribute it, often within weeks
- Your family gets the money faster when they need it most
The Numbers: What Trust Placement Can Save
| Estate value (excl. policy) | Policy value | Without trust: IHT on policy | With trust: IHT on policy |
|---|---|---|---|
| Already above NRB | £250,000 | £100,000 | £0 |
| Already above NRB | £500,000 | £200,000 | £0 |
| Already above NRB | £1,000,000 | £400,000 | £0 |
A couple with a £500,000 whole-of-life policy and an estate otherwise well above the nil-rate band could save £200,000 in IHT by simply writing the policy in trust.
The Two Main Trust Types for Life Insurance
Absolute (bare) trust
- Beneficiaries are named and fixed at outset
- Cannot be changed later
- On death, the payout goes directly and automatically to named beneficiaries in stated shares
- Simpler administration
- Best for: fixed family circumstances where you are confident about beneficiaries
Discretionary trust
- Beneficiaries are defined as a class (e.g. “my children, grandchildren, and their descendants”)
- Trustees decide who receives what and when
- Flexible — if circumstances change (a beneficiary dies, has debt problems, goes through divorce), trustees can respond
- Best for: most couples, families with children not yet born, and anyone who wants flexibility
Most financial advisers recommend discretionary trusts for life insurance because they handle the most common real-world complications.
Worked Example: Tom and Sarah’s Policies
Tom and Sarah each have £300,000 term life policies. Their combined estate (home + savings) is worth £850,000 — already well above their combined nil-rate band of £650,000 (with RNRB for the home passing to children: up to £1,000,000 — but assume here they have no RNRB eligibility for simplicity).
Without trust: If Tom dies, his £300,000 policy pays into his estate. Estate value rises to £1,150,000.
- Taxable above NRB (£325,000 assumed): £825,000 × 40% = £330,000 IHT
With trust: Tom’s policy pays to trustees, not his estate. Estate remains £850,000 minus his share.
- The £300,000 is distributed direct to Sarah or children with no IHT
- Sarah’s own policy should also be in trust for the same reason
How to Actually Do It: Step by Step
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Contact your insurer — call or email the policy administration team and ask for a trust deed or trust nomination form. Almost all major UK insurers (Aviva, Legal & General, Royal London, Zurich, Vitality, etc.) provide these free.
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Choose your trust type — discretionary for flexibility; bare/absolute if you want to fix beneficiaries now.
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Appoint trustees — you need at least two. Common choices:
- Your spouse or civil partner + a sibling, parent, or trusted friend
- You can name yourself as a trustee (common), but you need at least one other
- Professional trustees (solicitor, financial adviser) can also be used — they charge fees
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Name or define your beneficiaries — for discretionary trusts, this is typically “my children, stepchildren, grandchildren, and their descendants” or similar. You can provide a separate letter of wishes guiding the trustees.
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Sign and return — the deed needs your signature and a witness. Return to the insurer; they note the trust on the policy records.
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Tell your trustees — make sure they know they are trustees, where the policy documents are, and that you have provided a letter of wishes.
What About Existing Policies Not in Trust?
If you already have life insurance that is not in trust, you can still put it in trust now — contact your insurer for assignment or declaration of trust forms. There is no time limit and no cost.
Note: assigning a whole-of-life policy with significant surrender value may constitute a transfer of value for IHT. For term insurance (no surrender value), assignment is not a transfer for IHT purposes.
Life Insurance in Trust vs Other IHT Strategies
| Strategy | IHT saving | Complexity | Cost |
|---|---|---|---|
| Write existing policy in trust | Full payout outside estate | Very low | Free |
| Take out new policy in trust | Full payout outside estate | Low | Premium cost |
| Outright gifts (PETs) | Potentially full value after 7 years | Low | None, but must survive 7 years |
| Discretionary trust for investments | Value outside estate | High | Legal fees + ongoing charges |
Writing life insurance in trust is the most cost-effective IHT strategy available — largely because it removes the payout from the estate at no additional tax cost.
See our is a life insurance payout taxable guide, discretionary trust IHT guide, and inheritance tax guide.