Trust Structures for Offshore Protection Policies: A Technical Guide

Placing a life insurance policy into trust is standard practice in international protection planning. It is not a complex transaction, but it requires an understanding of the trust types available, the legal implications of each, and the ongoing obligations the structure creates. This guide provides a technical overview for clients and advisers who want to go beyond the basics.

Why a Trust Is Used

The primary purpose of a trust is to ensure that the life policy's death benefit is paid quickly to the right people without passing through the deceased's estate.

When a life policy is not in trust, the death benefit forms part of the estate. Two significant consequences follow:

Probate: the estate cannot be distributed until probate is granted — the legal confirmation that the executor has authority to deal with the estate's assets. In the UK, probate can take six months or more in complex cases. Until probate is granted, the insurance proceeds sit with the insurer unpaid.

Inheritance tax: in the UK, the deceased's estate is potentially subject to inheritance tax (IHT) at 40% on the value above the nil-rate band (£325,000 per individual in 2026). A life policy that forms part of the estate increases the taxable estate and may result in a significant IHT liability on the very sum intended to support the family.

A policy in trust is neither part of the estate for probate purposes nor for IHT assessment (provided the trust was properly constituted and no reservation of benefit exists). Trustees can claim and receive the policy proceeds within days of submitting the required documentation, regardless of the estate's probate position.

For internationally mobile clients with assets in multiple jurisdictions, trust structures also simplify the cross-border administration of the policy proceeds, which would otherwise be caught in multi-jurisdiction succession procedures.

The Main Trust Types

Discretionary Trust

A discretionary trust is the most widely used and most flexible trust structure for life insurance policies.

How it works: the settlor (the policy owner) places the policy into trust, appointing trustees and defining a class of potential beneficiaries (for example, spouse, children, and grandchildren). The trustees have discretion to decide which beneficiaries receive a distribution, in what amounts, and at what times. The settlor can write a letter of wishes — a non-binding statement of their preferences — to guide the trustees.

Advantages: maximum flexibility. The settlor can change the letter of wishes to reflect changing family circumstances (births, divorces, estrangements) without changing the trust deed. The trustees can respond to circumstances at the time of the claim in a way that an absolute trust cannot.

IHT and the relevant property regime: under UK law, property held in a discretionary trust is treated as 'relevant property' and is subject to periodic IHT charges — up to 6% of the trust value above the nil-rate band at each 10-year anniversary, and on distributions from the trust. For most life insurance trusts where the primary asset is the policy contract (rather than a large accumulated cash value), the periodic charge is often nil because the policy's value does not exceed the nil-rate band until a claim is made — at which point the proceeds are distributed promptly, triggering an exit charge rather than a periodic charge. Professional advice should confirm the IHT position for the specific facts of each case.

Most suitable for: married couples or those with complex family arrangements (blended families, minor children) where flexibility in distributions is valued.

Absolute Trust

An absolute trust (also called a bare trust) fixes the beneficiaries at the outset. The beneficiaries' interests are vested and irrevocable — they cannot be changed after the trust is created.

How it works: the settlor nominates specific individuals as absolute beneficiaries at the time the trust deed is signed. Each beneficiary has a fixed, defined share of the proceeds.

Advantages: legal simplicity. There is no IHT periodic charge on an absolute trust — once the policy is in trust, the settlor's estate has made a potentially exempt transfer. There is no discretion for trustees to exercise, which also reduces the scope for dispute.

Disadvantages: rigidity. If a named beneficiary predeceases the settlor, or if a divorce means the ex-spouse is no longer a desired beneficiary, the trust cannot be changed. The absolute beneficiary has a legal right to their fixed share.

Most suitable for: single clients with straightforward family arrangements, or as a keyman/business protection vehicle where the business entity is the sole beneficiary.

Split Trust

A split trust is designed for policies that combine both a critical illness benefit and a life assurance element (such as an accelerated CI rider on a UL policy, or a standalone policy covering both death and CI).

How it works: the trust separates the two benefits. The life element is placed in trust for the beneficiaries, in the same way as a standard discretionary or absolute trust. The critical illness element is retained by the settlor personally — not in trust — so that if the insured makes a CI claim, the proceeds are paid directly to them for their own use during their lifetime.

Why this matters: if both benefits were in trust, a CI payout would technically be a distribution from the trust to the settlor — potentially with IHT and trust law implications. By splitting the benefits, the CI element is not trust property, and the policyholder receives the CI benefit directly.

Most suitable for: any client with a combined life and CI policy where they want the CI payout accessible to themselves while keeping the life benefit outside the estate.

Flexible Trust

A flexible trust is a hybrid between a discretionary and an absolute structure. At inception, specified beneficiaries have fixed interests, but the trust deed includes a power of appointment that allows the trustees to redirect benefits to additional or alternative beneficiaries within a defined class.

Flexible trusts are less commonly used for simple life policies but are found in more complex estate planning structures where control of future distributions matters.

The Isle of Man Trust Law Framework

Most international life policies are issued by Isle of Man-regulated insurers. Isle of Man trust law — governed by the Trusts Act 1995 (as amended) — is generally considered a sophisticated and well-developed framework that is flexible, pro-beneficiary, and widely recognised internationally.

IoM trusts are used for international policies because they can be administered by IoM-based trustees, governed by IoM law, and remain outside many jurisdictions' domestic trust and succession regimes. This provides structural certainty for clients who move between countries.

However, the policy benefit — when paid out — may be subject to the tax and succession law of the country where the beneficiaries reside. A UK-resident beneficiary receiving proceeds from an IoM trust is subject to UK tax rules on the distribution. Local advice in the beneficiaries' country of residence should always be obtained.

Setting Up a Trust

The trust is established at the point of policy application, or shortly thereafter. The process:

1. The settlor selects the appropriate trust type with their adviser.
2. The trust deed is drafted (the insurer typically provides a standard trust deed as part of the application pack; more complex arrangements require bespoke legal drafting).
3. The settlor and trustees sign the trust deed.
4. The policy is assigned into the trust.
5. The policy schedule records the trust as the policy owner.

Trustees must be appointed. Most insurers require a minimum of two trustees. Options include:

• Personal trustees: family members or trusted individuals. They must be adults and should understand their legal obligations. Most insurers accept two personal trustees.
• Professional trustees: regulated trust companies or solicitors acting in a trustee capacity. They provide continuity (unlike a personal trustee, they do not die or become incapacitated), expertise, and impartiality. There is a cost for professional trusteeship — typically a small annual fee.

The 10-Year Periodic Charge

For UK-resident settlors placing a policy into a discretionary trust, the periodic charge should be understood, even if it is unlikely to apply in practice.

Under the Inheritance Tax Act 1984, discretionary trusts in the relevant property regime are subject to a charge on each 10-year anniversary. The charge is up to 6% of the trust's value above the available nil-rate band.

For a life insurance policy held in trust before a death claim, the 'value' of the trust property is typically the policy's current surrender value — which for a term assurance policy may be zero, and for a universal life policy is the accumulation account value. In many cases, the accumulation account value will be below the nil-rate band, so no periodic charge arises.

On the insured's death, the proceeds flow into the trust and the trustees should distribute them to beneficiaries promptly. An exit charge may apply to distributions made from the trust, but this is typically very small relative to the 40% IHT saving achieved by keeping the proceeds outside the estate.

What Happens if You Need to Change the Trust Structure

If a discretionary trust is used and family circumstances change, the trustees can update the letter of wishes at any time. The trust deed itself cannot typically be changed once executed, but the letter of wishes is not legally binding and can be revised freely.

For absolute trusts, change is not possible. If an absolute trust no longer reflects the settlor's wishes, the only option is to consider whether the existing policy should be surrendered and a new policy placed in a more appropriate structure — with the attendant costs and underwriting implications.

This is one reason discretionary trusts are generally preferred for most clients: the flexibility to adapt to life changes is preserved.

---

This guide is for information only and does not constitute legal, tax, or financial advice. Trust law and IHT rules are complex, jurisdiction-specific, and subject to change. The information above refers primarily to UK and Isle of Man law as of 2026. Seek independent legal and tax advice from a qualified professional before establishing any trust structure.

How Global Investments Can Help

We incorporate trust structuring into every life assurance recommendation. Our advisers explain the available trust types, model the IHT implications, and coordinate with legal advisers where bespoke trust drafting is required.

For existing policies that are not currently in trust, we can review whether the policy can be retrospectively assigned into an appropriate trust structure. Contact our protection team to discuss your estate planning requirements.