Policy in Trust UK IHT & Probate Savings

Discover how placing your life insurance policy in a trust can protect your beneficiaries from Inheritance Tax and probate delays. Our UK Policy in Trust Saver calculator helps you estimate potential savings and make informed estate planning decisions

Taking out a life insurance policy is a responsible step to protect your loved ones financially. But did you know that without one simple, often free, legal step, a large chunk of that payout could be lost to the taxman or tied up in legal delays for months?

This is where writing your policy 'in trust' comes in. It's a powerful estate planning tool that ensures the full value of your life insurance goes to the people you intend it for, quickly and efficiently.

Our straightforward Policy in Trust Saver is designed to show you just how much money and time you could save.

What Is a Life Insurance Trust? Explained Simply

Think of a trust as a secure legal box. When you take out a life insurance policy, you can place it inside this box.

There are three key people involved:

• The Settlor: This is you, the person who sets up the trust and puts the policy inside.
• The Trustees: These are the people you appoint to look after the box. You should choose at least two people you trust completely, like a spouse, adult children, or a solicitor. They are legally responsible for managing the trust.
• The Beneficiaries: These are the people you want to receive the money from the life insurance payout.

When you pass away, the insurance company pays the money directly to the trustees. The trustees then pass it on to your beneficiaries according to your wishes. The crucial part? The money never legally becomes part of your estate.

The Problem: Inheritance Tax (IHT) and Probate

If you don't put your policy in a trust, the payout is usually added to your 'estate' – the total value of everything you own (property, savings, investments, etc.). This creates two major problems.

1. Inheritance Tax (IHT)

Inheritance Tax is a tax on the estate of someone who has died. In the UK, every individual has a 'nil-rate band', which is currently £325,000. Anything in your estate above this amount is typically taxed at a hefty 40%.

Let's say your estate is worth £300,000 and you have a £250,000 life insurance policy not in trust. On your death, the payout is added to your estate, making it worth £550,000.

• Total Estate: £550,000
• IHT Nil-Rate Band: £325,000
• Taxable Amount: £225,000 (£550,000 - £325,000)
• IHT Bill: £90,000 (40% of £225,000)

Your beneficiaries would lose £90,000 of the payout to the taxman.

2. Probate Delays

Before your beneficiaries can receive anything from your estate, your executors must apply for a legal document called a 'Grant of Probate'. This process involves valuing the entire estate, settling debts, and dealing with HMRC. It can be lengthy and complex, often taking 9 to 12 months, or even longer.

During this time, the life insurance payout is frozen along with the rest of your assets, leaving your family without access to the funds when they may need them most.

The Solution: Fast, Tax-Free Payouts

Placing your policy in trust solves both of these problems at once.

• Avoids IHT: Because the policy is in the trust 'box', it sits outside your estate. It doesn't get added to your other assets and isn't counted for IHT purposes. The full payout goes to your beneficiaries.
• Bypasses Probate: The trustees can claim the payout from the insurer as soon as they have the death certificate. They don't need to wait for probate. This means your loved ones can receive the money in a matter of weeks, not months or years.

How to Use Our Policy in Trust Saver Calculator

Our Policy in Trust Saver is designed to give you a clear, personalised estimate of the benefits. It's simple to use and only takes a minute.

Step 1: Your Inputs

You only need to enter two figures:

1. Life Insurance Payout Amount (£): This is the sum assured on your policy – the amount it will pay out.
2. Estimated Value of Your Estate (£): This is a rough total of your other assets, like your home (minus any mortgage), savings, investments, and valuable possessions. Don't include your life insurance payout here.

Step 2: Your Results

The calculator will instantly show you:

• Potential IHT Saving: The estimated amount of Inheritance Tax that a trust could save your beneficiaries.
• Total Payout to Beneficiaries (With Trust): The full, tax-free sum your loved ones would receive.
• Total Payout to Beneficiaries (Without Trust): The reduced amount they might receive after IHT.
• Estimated Time Saved: The typical time saved by avoiding the lengthy probate process.

Worked Example

Let's look at Sarah's situation:

• Life Insurance Payout: £400,000
• Estimated Estate Value: £500,000

Without a Trust:

• Her total estate becomes £900,000 (£500,000 + £400,000).
• The taxable portion is £575,000 (£900,000 - £325,000 nil-rate band).
• The IHT bill is a staggering £230,000 (40% of £575,000).
• The payout is delayed by probate.

With a Trust:

• Her estate remains at £500,000.
• The taxable portion is £175,000 (£500,000 - £325,000).
• The IHT bill on her estate is £70,000.
• The £400,000 life insurance payout goes directly to her beneficiaries, tax-free and without probate delays.

The Policy in Trust Saver would show Sarah that using a trust could save her family £160,000 in tax and get them the money around 9 months faster.

Common Mistakes to Avoid

1. Forgetting to Do It: The biggest mistake is simply not putting the policy in trust. Most insurers offer this service for free when you take out a policy, so there's no reason to skip it.
2. Choosing the Wrong Trustees: Appoint people who are responsible, willing to act, and likely to outlive you. Always have at least two.
3. Using the Wrong Trust: There are different types, like 'Absolute' and 'Discretionary' trusts. An Absolute Trust names specific beneficiaries who can't be changed. A Discretionary Trust gives the trustees flexibility to decide based on your wishes. It's often best to seek advice on which is right for you.
4. Not Reviewing Your Choices: Life circumstances change. Review your choice of trustees and beneficiaries every few years, especially after major life events like marriage, divorce, or the birth of children.

What to Do After You Get Your Result

After using the calculator and seeing the potential savings, your next steps are clear:

1. If you have an existing policy: Contact your insurance provider. They can provide you with the trust forms and guide you through the process. It's usually straightforward.
2. If you are buying a new policy: Make sure you complete the trust forms as part of your application. The team at WeCovr can help you with this, ensuring your policy is set up correctly from day one.
3. Discuss with an expert: Estate planning can feel complex. A financial adviser can help you understand how a trust fits into your wider financial plan.

Broader Protection: Life Insurance and Private Medical Insurance

Setting up a trust is a smart move to protect the legacy you leave behind. This planning should be part of a wider strategy to protect your family's financial wellbeing, both now and in the future.

• Life Insurance: This is the foundation. It provides the financial safety net your family will rely on if you're no longer around. WeCovr's experts can help you compare quotes from leading UK insurers to find the right level of cover at a competitive price.

• Private Medical Insurance (PMI): While life insurance protects your family after you're gone, PMI protects your health while you're living. It gives you fast access to diagnosis, consultations, and treatment in private hospitals, helping you get back on your feet sooner. When you buy life insurance or PMI through WeCovr, we can often secure discounts on other policies you need. As a bonus, our clients also receive complimentary access to CalorieHero, our AI-powered diet and calorie tracking app to support their health goals.

Important Note on PMI: UK PMI is designed to cover acute conditions that begin after your policy starts. It does not cover pre-existing conditions (illnesses you already have) or chronic conditions (long-term illnesses that can't be cured).

Frequently Asked Questions (FAQs)

1. Is it expensive to put a life insurance policy in trust? No. Most insurance providers, including those on the WeCovr panel, offer this service completely free of charge when you take out or amend a policy.

2. Can I put an existing life insurance policy into a trust? Yes, in most cases. You can contact your insurer and ask for the relevant trust documentation to place your existing policy into a trust.

3. Who should I choose as my trustees? You should choose at least two people over the age of 18 whom you trust implicitly. This could be your spouse, a sibling, an adult child, a close friend, or a professional like a solicitor. Make sure you ask them first!

4. What are the main types of trust for life insurance? The two most common are Absolute (or 'Bare') Trusts and Discretionary Trusts. An Absolute Trust names fixed beneficiaries and their shares, which cannot be changed. A Discretionary Trust gives your trustees more flexibility to decide how and when to distribute the funds to a wider class of potential beneficiaries, based on a letter of wishes you write.

Take Control of Your Legacy Today

A life insurance policy is only half the job. By taking the simple step of writing it in trust, you ensure your legacy is protected from tax and delays, delivering the maximum benefit to your loved ones exactly when they need it.

Use the Policy in Trust Saver now to see your potential savings. Then, contact WeCovr for a free, no-obligation quote and expert guidance on setting up your life insurance and trust correctly.