Can a Relevant Life Trust Become a Family Trust?
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Once a relevant life policy pays out, the discretionary trust holding the funds doesn't have to be closed straight away. It can be kept running for years and used as a family trust for your spouse and children, with only one real tax cost: a periodic charge every 10 years, capped at 6% of the trust's value above the available nil rate band of £325,000 (gov.uk/inheritance-tax). For many directors, keeping the money in trust rather than paying it straight out in cash is the safer route for the family long term, and that's what this article covers.
Key facts
- A relevant life trust doesn't have to be closed once a claim is paid, it can be kept running as a family trust for as long as the family wants.
- Funds held in trust stay outside the beneficiaries' personal estates, so they aren't exposed to inheritance tax on a later death.
- A discretionary trust pays a periodic charge every 10 years, capped at 6% of the value above the nil rate band, currently £325,000.
- If a family trust already exists, relevant life funds can usually be transferred into it with no extra tax charge.
- If both the life assured and the trustee spouse die together, the company's other shareholders or a personal representative can step in to release the funds.
- Beneficiaries can normally take an interest-free loan from the trust without triggering a full withdrawal.
Why keep the money in trust rather than take it as cash?
Cash paid out of a relevant life trust immediately becomes part of the recipient's own estate and loses the trust's protection. A widow who banks the payout, remarries, and later dies herself could see that money pass to her new husband rather than staying with her children. Keeping the funds in trust avoids this: the money stays ring-fenced for the named beneficiaries, survives remarriage and divorce, and can still be lent to family members interest-free whenever they need it. Our guide to relevant life insurance and trusts covers how the trust is set up in the first place, so this article picks up from there.
How does a relevant life trust turn into a family trust?
Every relevant life trust names the company as a trustee alongside any individual trustees, usually a spouse or family member. To convert the trust into a long-term family arrangement, the company trustee simply resigns once the claim is settled, leaving the remaining personal trustees to run it going forward. A spouse who inherits the company's shares can sign as both a personal and company trustee, but only once they've been formally appointed as a director, being a shareholder alone isn't enough to act on the company's behalf.
Executive Life is authorised and regulated by the Financial Conduct Authority (FCA Ref: AJO01072), and we'd always recommend speaking to your adviser and a solicitor before changing trustees or converting a trust for long-term family use, since the right approach depends on your family's circumstances.
What is the 10-year periodic charge, and how much does it cost?
A discretionary trust is charged a periodic fee every 10 years on any value above the settlor's available nil rate band, currently £325,000. The rate is capped at 6% of the amount above that threshold, and there's no charge at all if the full nil rate band covers the trust's value. HMRC sets out the full mechanics on its trusts and inheritance tax pages, and the examples below use the standard £325,000 band for 2026/27.
If the funds are paid out to beneficiaries before a 10-year anniversary is reached, no periodic charge applies at all. Any unused nil rate band from other trusts or the settlor's estate can also reduce the amount charged, so the figures above are a worst-case illustration rather than a fixed cost.
What happens if both trustees die at the same time?
It's common to name a spouse as the personal trustee alongside the company, on the assumption they'll look after the funds if the life assured dies. If the life assured and that spouse die together, the company becomes the trust's only remaining trustee. Where there are no other shareholders, the personal representative of whichever spouse died last has the legal power to appoint a new director, who can then sign the release paperwork as the company's trustee. Where other shareholders already exist, they simply become the company's de facto trustee and can release the funds without being able to change the beneficiaries or keep the money themselves.
FAQs: relevant life trusts and family trusts
Does a relevant life trust have to be wound up once the claim is paid?
No. A relevant life trust can keep running indefinitely once a claim is settled, with the company trustee stepping down so personal trustees can manage it as a family trust.
Is there tax to pay if I move relevant life trust funds into an existing family trust?
No. Transferring the funds into an existing family trust doesn't trigger an extra tax charge, and the money continues to sit outside anyone's personal estate for inheritance tax purposes.
How much is the 10-year periodic charge on a family trust?
The charge is capped at 6% of the trust's value above the available nil rate band, currently £325,000, and applies only at each 10-year anniversary of the trust.
Can my children borrow from the trust before it's paid out to them?
Yes, in most cases beneficiaries can take an interest-free loan from a family trust without it counting as a full withdrawal, keeping the remaining funds protected.
What happens if the trustee spouse dies before the funds are released?
The court can replace an unresponsive or deceased trustee so funds aren't left stuck indefinitely, and where the company is the only remaining trustee, a personal representative or fellow shareholder can step in to appoint a new one.
Written by Alex Ogden DipFA | Director | Executive Life
Alex Ogden DipFA holds the Level 4 Diploma for Financial Advisers (DipFA) awarded by the Walbrook Institute London, formerly known as the London Institute of Banking & Finance (LIBF), the FCA's benchmark qualification for retail investment advisers. He is authorised by the FCA — Ref: AJO01072.
Last reviewed: September 2026 — Next review: April 2027 | Estimated reading time: 5 minutes
This article is for information purposes only and does not constitute financial advice. Tax treatment depends on individual circumstances and may be subject to change. Always seek professional advice before making financial decisions.