Benefits of Placing Life Assurance Under Trust


When taking out a life cover policy a trust should normally be considered.  In this article we will look at an example of someone taking out a new term assurance policy, the advantages and implications of using a trust, and how to set it up.

Facts and analysis


Mr and Mrs Smith are married with 2 young children.  They have reviewed their existing life cover, the outcome of which is that Mr Smith is now going to take out a new term assurance policy on his name only, with a sum assured of £350,000.  The purpose of the policy is to protect the family in the event of Mr Smith’s premature death.  Mr and Mrs Smith have wills in place which leave everything to each other.

The Problem

The term assurance policy will provide life cover for Mr Smith for the term of the policy.  If Mr Smith dies, as the policy owner the proceeds will be paid to his estate.  Assuming that they remained married, let’s consider two possible scenarios and the impact from an IHT perspective –

 1  Mrs Smith pre-deceases her husband

  • The sum assured of £350,000 is paid to Mr Smith’s estate on his death

  • His total estate less the nil rate band/residence nil rate band (plus any of Mrs Smith’s unused nil rate band/residence nil rate band from her earlier death) is taxable to IHT at 40%

  • And the net estate is distributed in accordance with the will

If the children are still minors, the executors of the will (or administrator under intestacy) will appoint trustees to look after the estate for the benefit of the children until they reach age 18.

 2  Mr Smith pre-deceases his wife

  • The sum assured of £350,000 is paid to Mr Smith’s estate

  • And as per the will his estate is passed to Mrs Smith with the spouse exemption and hence no IHT is due

  • The life cover proceeds will form part of Mrs Smith’s estate on death if not spent

If Mrs Smith is alive at the time of his death and he is still married to her, this will not create any immediate IHT issues if the whole estate is passed to Mrs Smith.

The sum assured, and all of the joint estate, is however then in Mrs Smith’s estate.  In the event of Mrs Smith’s death she will normally have her own and Mr Smith’s nil rate band/residence nil rate band, and hence anything over £650,000 (nil rate band) plus a maximum of £350,000 (residence nil rate band) (2022/23) will suffer tax at 40%.

The Solution

The life policy can be made subject to a trust either at the outset or assigned at a later date.  This means that the proceeds of the policy are paid to the trustees in the event of Mr Smith’s death within the term of the policy.  The advantages of this are –

  • The trustees should receive the money quickly as there is no need to wait for probate

  • Mr Smith can choose who he wants to receive the money and can update this during his lifetime.  If Mrs Smith predeceases him he can make his wishes known that the money is to go to his children.  Equally if Mr Smith divorces Mrs Smith and moves in with Miss Brown, he will have complete flexibility to change the beneficiaries if he chooses

  • If the beneficiaries are children, the trustees Mr Smith appoints will look after the money until they are old enough to look after it themselves

  • The life policy will not be part of Mr Smith’s estate on his death

  • Mrs Smith can take interest free loans from the trust instead of receiving the money outright.  This means that the proceeds of the life policy will not be part of Mrs Smith’s estate on her death.

How to set up the trust

There are three parties to the trust –

  • The Settlor – This is the person who sets up the trust and transfers property into it, which in our example is Mr Smith

  • The Trustees – they are the people who are legally bound to look after the property in line with the terms of the trust for the beneficiaries.  The settlor will normally automatically be a trustee, and it is recommended that they appoint at least one other trustee. This is so that on the settlors death there is another trustee already in place.

  • The beneficiaries – they are the people who will receive the benefits from the trust.  The settlor will choose the beneficiaries at the outset.  If the trust is discretionary the settlor can change the beneficiaries, and should make their wishes clear to the trustees.  Beneficiaries can include children and grandchildren not born at the time of setting up the trust.

After setting up the trust there are a number of options for Mr Smith as the settlor –

  • He can remove and add a trustee.  For example if the trust is initially set up with Mrs Smith as the additional trustee and they subsequently divorce, Mr Smith can remove Mrs Smith as a trustee and add Miss Brown.

  • He can change the beneficiaries under the trust.  On divorce he may still wish the proceeds of the policy to go to Mrs Smith, but if more appropriate he could change the beneficiaries to his children and/or Miss Brown.

If the trust is set up at the same time as the life policy the policy application and trust deed should be submitted together.  The trust deed must be dated on or after the date on the policy application.  Subject to underwriting, the policy documents will then be issued to the trustees along with the original trust deed.

It is also possible to gift an existing life policy to a trust at a later date, and in this case a trust deed should be completed with the existing policy number listed as the trust property.

There is no problem in putting an existing life policy into a trust, but there can be some tax implications. When the life policy is transferred into the trust it is a chargeable lifetime transfer.  For a term assurance policy the value for the chargeable lifetime transfer is the open market value.  The open market value is going to be nil unless the life assured is in poor health and likely to die before the policy ends.  A term assurance will only be available to someone in good health and likely to survive to the end of the term and hence at the outset it will have no value.  If, however, the life policy is transferred to a trust at a time when the life assured is not in good health, it will be taxed as a chargeable lifetime transfer.

The premiums paid are treated as a gift for inheritance tax purposes.  The premiums are, however, usually exempt from any IHT calculation under the normal expenditure from income exemption or the annual exemption.

Next steps

When arranging protection cover its important to ensure the policy proceeds will be made available to the right people as quickly as possible. In all circumstances consideration should be given to the client’s individual circumstances, the implications of not having a valid Will and the application of the Intestacy rules together with the benefits of making the policy subject to a suitable trust.

Important information

This information has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and 6 April 2021. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice

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