Insurance Trust Structures for Inheritance Tax Planning

Inheritance tax (IHT) — or its equivalents under different names in different jurisdictions — represents one of the most significant wealth transfer costs faced by successful families. A life assurance policy placed into an appropriate trust is one of the oldest and most widely used mechanisms for mitigating this cost. For internationally mobile families, who may face IHT exposure in multiple jurisdictions simultaneously, the interaction between trust structures and international tax obligations requires careful design.

This guide explains how insurance trust structures work for IHT planning, the main options available, and the specific considerations for families with cross-border assets and connections.

Inheritance Tax and Life Assurance: The Basic Problem

In the United Kingdom, inheritance tax is charged at 40% on the value of an estate above the nil-rate band (£325,000 as of 2026, potentially enhanced by the residence nil-rate band). For estates containing property, investments, and business assets, IHT liabilities can be substantial.

A life assurance policy that is not written in trust forms part of the estate on death. It adds to the taxable value of the estate and may itself attract a 40% IHT charge on its death benefit. The proceeds are also held up in the estate administration process, potentially for months, while the estate awaits probate.

The solution is straightforward: place the policy in trust. If done correctly, the death benefit passes directly to the trustees (and thence to beneficiaries) without forming part of the estate, avoiding both the IHT charge and the probate delay.

IHT Planning Applications of Life Assurance Trusts

Providing Liquidity to Pay the IHT Liability

When a taxable estate includes illiquid assets — property, business interests, art, or private equity investments — the family may face a situation where a significant IHT liability is due but the assets needed to pay it cannot be sold quickly.

A life assurance policy in trust — paying out as soon as the death certificate and policy documentation are in order — provides liquid cash that can be used to pay the IHT liability before the estate is formally administered. This prevents forced sales at unfavourable prices.

The policy death benefit should be sized to match the expected IHT liability. Periodic reviews are needed to adjust the sum assured as the estate value changes.

Whole of Life Policies for Estate Equalisation

A whole of life policy — which pays whenever death occurs, not just within a defined term — is particularly suitable for IHT planning. The sum assured remains available regardless of when death occurs.

Premiums paid on a whole of life policy in trust are typically gifts to the trust for IHT purposes. If the premiums fall within the "normal expenditure out of income" exemption (i.e., they are regular, habitual, and do not reduce the standard of living of the donor), they are exempt from IHT as they are made. This can allow a significant whole of life policy to be funded over time without creating a taxable gift.

Discretionary Gift Trust

A lump-sum life assurance bond or endowment may be settled into a discretionary trust during the policyholder's lifetime. This is a chargeable transfer for IHT purposes; if the value exceeds the nil-rate band at the time of the gift, immediate IHT at 20% may be payable. However, the asset then falls outside the estate and, provided the settlor survives seven years, the gift is outside the estate for IHT entirely (in the UK framework).

This approach is particularly used for offshore life assurance bonds or single-premium life assurance policies where the policy value is the investable asset.

UK IHT: The Seven-Year Rule and Trust Planning

Under UK IHT rules, most gifts — including assets transferred into a discretionary trust — are potentially exempt transfers (PETs) if made directly to individuals, or chargeable lifetime transfers (CLTs) if made into discretionary trusts. The IHT treatment depends on whether the donor survives seven years after the gift.

For life assurance policies:

• A policy taken out in the name of a trust (assigned directly into trust at inception) is not typically a transfer of value at all — no IHT is immediately payable
• A policy that has been personally held and is then assigned into trust is a transfer of value at the point of assignment — the value is the surrender value (or market value) of the policy at the date of assignment

Because a term life assurance policy with no cash value has a nil surrender value when assigned into trust, the assignment creates no immediate IHT liability. This is why term policies are most commonly placed into trust at inception: the trust is established as a condition of the policy being taken out, and the assignment has negligible IHT cost.

A whole of life or investment bond with a significant surrender value cannot be assigned into trust so cheaply. The assignment is a gift of the surrender value, with IHT implications depending on the amounts and available exemptions.

The Nil-Rate Band Discretionary Trust (NRBDT)

One widely used IHT planning structure is a nil-rate band discretionary trust: on the first death in a married couple, assets up to the nil-rate band (currently £325,000) are settled into a discretionary trust rather than passing to the surviving spouse. This uses the first deceased's nil-rate band at the time of death (rather than relying on it transferring to the survivor), and means the trust assets — and any growth on them — are outside the survivor's estate.

A life assurance policy can be written on a joint life, second death basis and placed into such a trust to provide the liquidity needed when the second death occurs.

International Families: Multi-Jurisdiction IHT Exposure

For internationally mobile families, IHT planning is more complex because multiple jurisdictions may assert a taxable interest in the estate:

UK long-term residence. From 6 April 2025 the UK moved from a domicile-based to a residence-based IHT system: the old domicile and deemed-domicile rules were abolished and replaced by the concept of a "long-term resident" — broadly, an individual who has been UK-resident for at least 10 of the previous 20 tax years. A long-term resident is exposed to UK IHT on their worldwide estate. This exposure is persistent and hard to shed: once someone has been UK-resident for 20 years, they remain within the worldwide UK IHT net for up to 10 years after leaving (the "IHT tail" tapers depending on the length of prior residence). This is a commonly misunderstood point — living in the UAE or Thailand does not automatically eliminate UK IHT exposure.

Country of residence. Many countries levy an equivalent of inheritance tax or estate duty on assets situated in that country, regardless of the deceased's nationality or domicile. A property in Spain, for example, is subject to Spanish inheritance tax regardless of the owner's nationality.

US estate tax. US citizens face estate tax on their worldwide assets regardless of residence. Permanently resident aliens (green card holders) face similar treatment. This applies even to those who have lived outside the US for decades.

Double taxation treaties. Some countries have bilateral treaties that prevent the same asset being taxed twice under different countries' inheritance/estate tax regimes. However, such treaties are not universal.

For an internationally mobile family, the first step in trust planning is mapping which jurisdictions could assert an IHT/estate tax interest in the estate and at what rate. The trust structure must then be designed to be effective in as many of those jurisdictions as possible.

Choosing the Right Trust Structure for an International Estate

The key structural choices are:

Jurisdiction of the Trust

The trust is governed by the law of a particular jurisdiction. For internationally mobile families, offshore trust jurisdictions — Isle of Man, Guernsey, Jersey, Cayman Islands, Cyprus, Bermuda — are commonly used because:

• They have well-developed, stable trust law
• They are recognised and respected internationally
• Their professional trustee industries are experienced in cross-border arrangements
• The regulatory environment provides meaningful policyholder and beneficiary protection

The choice of jurisdiction should be made with reference to where the beneficiaries are likely to reside, the jurisdictions whose tax rules must be satisfied, and the location of the trustee companies.

Discretionary vs Fixed Interest

A discretionary trust allows trustees to distribute among a class of beneficiaries in whatever proportions they see fit. This provides maximum flexibility as circumstances change. However, in some jurisdictions, discretionary trusts may be treated less favourably for tax purposes than fixed-interest trusts (where each beneficiary's share is specified).

A fixed interest (or bare) trust over a life policy is simpler but loses flexibility if the beneficiary predeceases the policyholder or circumstances change significantly.

Excluded Person Provision

In UK IHT planning, the settlor must typically be excluded from the trust's benefit. A settlor who can benefit from a discretionary trust (other than in very specific carve-out circumstances) will have the trust assets treated as part of their estate for IHT. This is the "gift with reservation of benefit" trap.

For internationally mobile families, the excluded person concept must be applied in the context of all relevant jurisdictions' rules, not just the UK.

Maintaining the Trust

Establishing the trust is not a one-time action. Ongoing requirements include:

• Trustees must hold trustee meetings and keep records of their decisions (particularly discretionary distributions)
• The trust should be reviewed when the policyholder's estate changes significantly
• Beneficiary class should be reviewed when family circumstances change
• Trust registration requirements vary by jurisdiction and may require registration with tax authorities (the UK's Trust Registration Service applies to UK trusts from a certain threshold)
• As the policyholder ages, the sum assured should be reviewed against the projected IHT liability

A trust that was established correctly at outset but never subsequently managed can create problems — particularly where the trust deed's requirements for trustee meetings or consent were not followed.

How Global Investments Can Help

Global Investments works with internationally mobile families on the full spectrum of insurance trust planning — from establishing the trust at the time of policy inception, to reviewing existing arrangements, to coordinating the trust with wider estate planning across multiple jurisdictions.

We work alongside trust lawyers, tax advisers, and family offices to design structures that are effective, durable, and appropriately maintained. We help clients understand their IHT exposure in each relevant jurisdiction, size their life assurance accordingly, and select providers with the capacity to issue international policies that integrate cleanly with the trust structure.

This guide is for information only and does not constitute tax or legal advice. IHT rules and trust law vary by jurisdiction and change over time. Seek regulated financial, legal, and tax advice in every relevant jurisdiction before establishing any trust structure.