No one likes to think about their own death. Because of this, many of us are financially unprepared for it, which could leave your family struggling. By taking a few simple steps, you can ease your concerns and give your family peace of mind, knowing that they don’t need to worry about their finances if the worst were to happen.

When you take out a whole of life plan, you can pay monthly or annual premiums, and so long as you keep up with the payments, you will remain covered until your death. You can also choose a policy where you won’t have to pay any premiums after a certain age or set period, but it will still pay out the insured amount upon your death.

A trust is a legal arrangement whereby the trust takes ownership of certain assets, in this case the payout from a life insurance policy. But assets held within a trust could also include your property, land, investments and other financial holdings.

The distribution of assets or policies held in the trust are overseen by a trustee, or trustees, that you appoint in accordance with your wishes.

You can set up a trust solely for your life insurance policy. The trustee(s) is responsible for keeping the paperwork safe and making the claim if you were to pass away.

There are four main benefits of placing your life insurance policy into a trust:

1. The payout from your life insurance policy won’t be subject to Inheritance Tax (IHT)
   Although a life insurance payout is tax-free, if you don’t write your life insurance policy in trust your family may have to pay IHT on it. If your overall estate exceeds £325,000, your beneficiaries could incur a tax bill of up to 40% on everything over that amount. Your spouse or civil partner won’t be liable for IHT, but an unmarried partner, children or grandchildren will be.
2. It will be easier for your family to access the life insurance payout
   If the life insurance policy is held within a trust, all the trustee(s) need to do to make a claim is submit the required paperwork and a death certificate. The payout is managed by the trustee(s) and could be available within a couple of weeks, avoiding potentially lengthy probate delays.
3. The insurance payout won’t automatically be used to pay off creditors
   Writing your life insurance into trust means you have more control over how the money from your policy is used. If you have any outstanding debts, the life insurance payout, held in trust, won’t automatically be used to pay off any creditors. It will be distributed by the trustee(s) directly to the beneficiaries under the terms of the trust.
4. If you’re not married to your partner, the payout will avoid intestacy rules
   Under current intestacy rules, if you’re unmarried and haven’t named your partner in your will, they could be left with nothing. Writing the policy in trust, and naming your partner as the beneficiary, will ensure they receive the money you intend for them.

You can dictate the terms of the trust, giving you complete control over who the money goes to and, if you wish, how the money is used.

There are three main types of trust: absolute (or bare trust), a flexible trust or a discretionary trust.

With a discretionary trust, you name the trust’s beneficiaries but don’t specify how the money is divided between them. In this instance, the trustee(s) have ultimate control, so it’s advisable to appoint a professional rather than a family member or trusted friend. You can write a ‘letter of wishes’ to give the trustee guidance, but because this is not legally binding, they could make their own decision.

A flexible trust is similar to a discretionary trust but allows you to state how you want the money distributed amongst your beneficiaries.

This is the most rigid trust and, once written, cannot be changed. You need to know exactly who the beneficiaries are and how you want the money distributed from the outset because you don’t have the option to change your mind later on.

When you initially purchase a life insurance policy, your insurer will give you the option of writing the policy into trust. This is something you can also choose to do at a later date. However, setting up a trust isn’t suitable for everyone. It’s important to speak to a financial adviser before you decide – they will help you choose the best approach and the type of trust to use, depending on your circumstances and goals.