If your child (the trust beneficiary) dies before you, and the life insurance policy was written in trust, then nothing happens at his/her death for inheritance tax (IHT). The trust simply continues. When you later die (e.g., five years after your child's estate has been settled), the policy pays out to the surviving/default beneficiaries named in the trust, outside your estate, outside his/her estate, and without probate.
1. What happens at your child’s death?
Because the policy is written in trust, the payout is not part of his/her estate and not part of yours. The trust owns the policy.
When your child dies:
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He/she never received the life insurance proceeds (because you are still alive), so nothing enters his/her estate.
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The trust simply loses one beneficiary.
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The trustees follow the trust deed to determine the next beneficiary class (e.g., your other children, grandchildren, or “default beneficiaries”).
There is no IHT charge at his/her death because:
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The trust has not paid out.
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No relevant‑property charges apply to a standard life‑insurance trust until the policy pays out.
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The trust continues unchanged.
This aligns with HMRC guidance that life insurance written in trust stays outside the beneficiary’s estate and bypasses probate entirely.
2. What happens when you later die?
At your death, the life insurance policy pays out. Because it is written in trust:
✔️ The payout does NOT enter your estate
Life insurance written in trust is outside the taxable estate for IHT purposes.
✔️ No probate delay
The trustees claim the money directly from the insurer. Probate is irrelevant.
✔️ The payout goes to whoever the trust deed names as the next beneficiaries
This could be:
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your other children
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grandchildren
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a class of beneficiaries
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or anyone named as “default” or “contingent” beneficiaries
If your child was the only beneficiary and no substitutes were named, the trustees follow the trust’s default clause (most standard life‑insurance trusts include one).
✔️ No IHT on the payout
Because the trust owns the policy, the payout is not part of your estate. HMRC only taxes life‑insurance proceeds when they fall into the estate (i.e., not in trust).
3. Does your child’s earlier death change anything?
No — his/her death does not trigger tax, does not collapse the trust, and does not pull the policy back into your estate.
The only time “reverter to settlor” rules matter is when:
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the trust is an interest‑in‑possession trust, and
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the life tenant dies while the settlor is alive, and
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the trust property reverts to the settlor.
But life‑insurance trusts are not interest‑in‑possession trusts, and the policy does not revert to you — it stays in trust until your death. The HMRC reverter rules therefore do not apply.
4. Summary — What actually happens
5. Practical takeaway
Your child’s death does not affect the tax treatment of the life‑insurance trust. When you die, the payout goes to the next beneficiaries named in the trust, tax‑free, and outside probate.
