Insurance Curator 
Inheritance Tax (IHT) can take a whopping 40% of your life insurance payout if you’re not careful. That’s why millions of UK families use trusts to dodge the bullet. But which trust type wins for your family? The choice between a discretionary trust and a bare trust isn’t just legal jargon — it’s about who gets control, when they get it, and how much HMRC takes.
If you want to keep your life insurance proceeds out of your estate and protect your loved ones, understanding these two trust structures is critical. Let’s break down exactly how each works, where they shine, and which one best fits your family situation.
What Is a Bare Trust for Life Insurance?
A bare trust — also called a simple trust — is the most straightforward way to hold a life insurance policy for someone else. The beneficiary has an absolute right to the policy and its proceeds. Once you set it up, you cannot change your mind later. The trustees hold the policy, but the beneficiary is entitled to everything from day one.
Key features of a bare trust:
- The beneficiary is fixed and cannot be changed.
- Trustees have no discretion over who receives the payout.
- Once the beneficiary turns 18 (in England and Wales), they can demand the policy.
- The trust falls outside your estate for IHT purposes, provided you survive seven years after writing the policy in trust.
Bare trusts are popular for straightforward family setups — like a parent naming their adult child. They are simple to create and administer, and the proceeds pass directly to the beneficiary without delay. However, the inflexibility can be a problem if circumstances change.
What Is a Discretionary Trust for Life Insurance?
A discretionary trust gives your trustees the power to decide who benefits from the life insurance payout and when. You define a class of beneficiaries — for example, your spouse, children, and grandchildren. The trustees then distribute the proceeds as they see fit, based on your letter of wishes.
Key features of a discretionary trust:
- Trustees have full control over distributions.
- You can add or remove beneficiaries within the class.
- No beneficiary has a right to the payout until the trustees decide.
- The trust offers greater flexibility for blended families, vulnerable beneficiaries, or business partners.
The trade-off? Discretionary trusts are more complex to set up and administer. They may also trigger periodic IHT charges every ten years (at up to 6%) and exit charges when funds leave the trust. But for many families, the flexibility far outweighs these costs.
Bare Trust vs Discretionary Trust: Side-by-Side Comparison
| Factor | Bare Trust | Discretionary Trust |
|---|---|---|
| Control | Beneficiary gains absolute right at 18 | Trustees decide who gets what, when |
| Flexibility | None — beneficiary is fixed | High — class of beneficiaries, changeable |
| IHT on policy payout | Outside estate if set up >7 years before death | Outside estate, but periodic/exit charges may apply |
| Protection from divorce/creditors | Low — beneficiary owns the asset | High — trustees control access |
| Suitability for minors | Poor — child gets payout at 18 regardless | Good — trustees can delay to age 21+ |
| Administration cost | Low — no annual returns needed | Higher — requires formal accounts and tax returns |
Which Trust Works Best for Your Family?
The answer depends on your family’s dynamics. Let’s look at common scenarios.
For a Standard Married Couple
If you are married with children and your main goal is to pass life insurance to your spouse then to kids, a bare trust often works well. Write the policy in trust naming your spouse as beneficiary. When they die, it passes to your children. Just remember: once your children turn 18, they can take control, which might not be ideal.
For Blended Families and Second Marriages
Blended families need discretionary trusts. Why? Because you want your current spouse to have income from the payout, but you also want to protect your children from your first marriage. A bare trust cannot deliver that nuance. With a discretionary trust, trustees can pay your spouse an income and keep the capital for your children. This avoids bitter disputes — read How Life Insurance Trusts Protect Blended Families and Second Marriages from Inheritance Disputes? for more depth.
For Vulnerable Beneficiaries (e.g., Disabled Children)
A discretionary trust protects means-tested benefits. If your child has special needs, a bare trust could disqualify them from state support because the asset is theirs absolutely. A discretionary trust keeps the payout in the trustees’ control, so your child can still claim benefits.
For Business Owners
If you have a life insurance policy to cover a Life Insurance Trusts for Business Owners: Protecting Shares, Partners and Key People, you might want a bare trust with your business partner as beneficiary. But if you want flexibility to replace partners later, a discretionary trust is smarter. Business dynamics change, and you don’t want the payout locked in.
For Parents of Young Children
Never use a bare trust if your children are minors. Once they turn 18, the entire payout is theirs — inheritance they might blow on a sports car. A discretionary trust lets you set the distribution age at 21, 25, or even 30. You can also stagger payouts (e.g., 30% at 21, rest at 25). That’s real peace of mind.
Setting Up Your Trust: What You Need to Know
You cannot just “write” a policy in trust without proper documentation. You need a solicitor or a trust deed provider. The cost ranges from £150 (online template) to £500+ (bespoke solicitor advice). If you live in London, Edinburgh, Cardiff, or Belfast, use our Regional Guide to Setting up a Life Insurance Trust: Finding Solicitors in London, Edinburgh, Cardiff and Belfast to find trusted experts.
Don’t forget to name your trustees wisely. For a discretionary trust, consider professionals (solicitor or accountant) if family dynamics are complex. For a bare trust, you can use your spouse or children as trustees.
Common Mistakes to Avoid
Failing to choose the right trust type can accidentally trigger a 40% IHT charge. For example, if you use a bare trust but die within seven years of setting it up under the gift with reservation rules, the payout could be dragged back into your estate. Learn the pitfalls in detail: Life Insurance Trust Mistakes That Can Accidentally Trigger a 40% Inheritance Tax Charge.
Another common error: forgetting to change trustees or beneficiaries when life changes. If you divorce and remarried, your ex-spouse might still be a trustee. See How to Change Trustees or Beneficiaries on a Uk Life Insurance Trust Without Messing up Your Tax Planning? for a safe approach.
Should You Use a Trust for Over 50s or Whole-of-Life Policies?
Many retirees wonder if they should write their over-50s plan or whole-of-life policy in trust. The answer: yes — if you want the payout to skip IHT. But watch out for the seven-year rule. For most policies, the trust is written on day one, so the clock starts immediately. Explore the full pros and cons in Should Your over 50S or Whole-of-life Policy Be Written in Trust? Pros and Cons for Uk Retirees?.
Final Verdict: Which One Wins?
For most families, a discretionary trust is the better choice. It offers flexibility, protects vulnerable beneficiaries, and adapts to life’s curveballs. Yes, it costs a bit more to set up and may involve periodic IHT charges — but those charges are typically small on a fixed life insurance lump sum, and the benefits of control far outweigh the costs.
Use a bare trust only when:
- You have a single, adult beneficiary who you trust completely.
- You want the simplest, cheapest option with zero ongoing administration.
- You are certain your circumstances won’t change.
Still unsure? Start by reading What Is a Life Insurance Trust in the Uk and How Does It Cut Inheritance Tax? to solidify the basics. Then talk to a solicitor in your area — they’ll help you pick the trust that keeps the taxman away and your family secure.
Do you already have a life insurance policy? Check if it’s written in trust. If not, act now — every day you delay, your family risks a 40% haircut.