The importance of putting life insurance in a trust if you are a woman with dependants

If you’re a woman with children or any other dependants, life insurance could provide a crucial financial safety net that ensures your loved ones are provided for after you’re gone.

However, if a payout from your life insurance policy forms part of your estate, your beneficiaries could lose a significant amount of the settlement to Inheritance Tax (IHT).

Indeed, HMRC figures (23 April 2025) reveal that IHT receipts from April 2024 to March 2025 reached a record high of £8.2 billion, an increase of £800 million compared to the same period the previous year.

Fortunately, placing life insurance in a trust could potentially help you shield payments from IHT. Keep reading to find out more about the advantages and drawbacks of using trusts in IHT planning.

Protect your family financially

If your life insurance is not placed in a trust, the payout will usually be included in your estate for IHT purposes.

Your beneficiaries may face an IHT bill if the total value of your estate, including the life insurance settlement, exceeds certain thresholds.

In 2025/26, you can pass on up to £325,000 (your “nil-rate band”) without incurring an IHT charge. If you pass on your main home to a direct descendant, such as a child or grandchild, you may also benefit from the “residence nil-rate band” of £175,000.

Assets you leave to a spouse or civil partner are exempt from IHT, regardless of how much your estate is worth.

Otherwise, any portion of your estate that exceeds the nil-rate bands will usually be subject to 40% IHT.

As you can see, including a life insurance settlement in your estate could easily push its value beyond the thresholds, resulting in an IHT bill for your beneficiaries. Indeed, if you have a policy worth £500,000 or more, this payout alone would exceed the regular nil-rate bands.

In contrast, putting life insurance in trust means that it is legally owned by the trustees and, as such, sits outside your estate. Any payout will go directly to your beneficiaries, who will receive the full amount.

This may be especially useful if you’re a woman with significant assets, as your dependants could use this settlement to cover any IHT charge that arise from your estate.

Take control of how payouts are distributed

As a mother or carer, taking control of how your children or dependants are supported financially after you’re gone is likely to be extremely important.

Placing life insurance in trust allows you to specify:

• Who will receive the payout
• How the funds should be distributed
• Who will manage the funds.

There are several types of trust, and some offer more control than others. So, it’s important to seek professional advice to help you choose a trust that meets your needs and preferences.

For example, you might choose to set up a trust that provides your dependants with regular payments until they reach a certain age. Or you may want to cover a specific expense, such as school or university fees.

Whatever your priorities are, writing life insurance into a trust puts you in the driver’s seat.

Allow your dependants fast access to funds

If you have life insurance that isn’t in a trust, any payout will go to your estate. As such, your dependants will have to wait until probate is granted before they receive any settlement from your policy.

Unfortunately, probate delays have risen significantly in recent years. According to IFA Magazine (16 January 2025), the number of probate cases taking more than a year to be granted increased by 134% between 2020 and 2023.

Delays in receiving a payout could be stressful and challenging for your dependants, who may need these funds to cover everyday costs or pay any IHT due on your estate.

By putting life insurance in trust, you can ensure that a payout is made directly to your beneficiaries without being stuck in probate. This will allow them to access the funds much more quickly as they won’t have to wait for the probate process to be completed.

Potential drawbacks to consider

While there are benefits to putting your life insurance in trust, it is also important to consider the potential drawbacks.

• Setting up trusts can be complicated – The choice of trusts available may feel overwhelming. Each comes with its own rules and level of flexibility. Tax and legal implications may vary too.
• Trusts offer limited flexibility – Once you’ve decided to place life insurance in trust, you can’t normally reverse your decision. What’s more, depending on the type of trust you choose, it might be difficult to make changes to your policy after it is placed in trust.
• Some loss of control – By putting life insurance in trust you hand over legal ownership to the trustees. As such, any future decisions you make about the policy will need to be signed off by them.
• There may still be IHT to pay – If you name someone as a beneficiary (other than a spouse or civil partner) and die within seven years, there may be IHT due on any life insurance payout.

Get in touch

I specialise in supporting women with their financial planning needs at all stages of their lives.

If you’d like help reviewing your life insurance needs and exploring the options for placing your policy in a trust, I’d love to hear from you.

To find out more, please get in touch by email at lottie@truefinancialdesign.co.uk or call 03300889138.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.