I'm not entirely sure, but I think that my wife is all too aware that I'm worth more dead than alive. I've tried to hide this fact, but she's smart enough to know how much insurance is on my life. Now, fortunately, she recognizes that there are also a few drawbacks to me not being around - and so I'm not preoccupied with checking the brakes on my car on a daily basis.
Now, when I took out this insurance on my life, I did things a little differently. I set up a testamentary insurance trust in my will. Let me share with you a little about what this thing is, and why I did it.
The Concept
What in the world is a testamentary insurance trust? Any time you see the word "testamentary" used in estate planning, it may mean you've got to die before any benefits kick in. Small technicality, I know. But hear me out, because a testamentary trust, created by way of your will after you've passed away, can provide huge benefits for your heirs. More specifically, a testamentary insurance trust is a trust that is established in your will that will receive the life insurance proceeds of a policy on your life once you're gone.
You see, these trusts are created by a beneficiary designation (and your will is great place to make this designation, provided it's worded properly), which directs the insurance proceeds to be paid to a trustee you identify in your will - rather than being paid directly to your intended beneficiaries. The trustee is appointed to receive and hold the proceeds for the benefit of beneficiaries you name. The insurance proceeds can be paid directly to the trustee, bypassing your estate altogether, which results in some great benefits.
The Benefits
So, what can a trust like this do for you - and your heirs more specifically? Consider these six benefits:
1. Managing distributions to minors:
If your beneficiaries are too young or immature, or simply unable to receive the life insurance proceeds directly, leaving those proceeds to an insurance trust will allow the trustee to control those funds and the distribution of those assets to the beneficiaries. In fact, without a trust for this purpose, it'll be necessary to obtain court approval for payments to minor beneficiaries, which is an administrative headache.
2. Protect insurance proceeds from creditors: When the trust is structured properly, the assets of the trust can be protected from creditors of the estate or creditors of the beneficiaries themselves. The use of an insurance trust, then, can ensure the payment of life insurance proceeds in a timely manner, even in the face of litigation against the estate.
3. Tax savings for the beneficiaries:
A testamentary trust is treated as a separate taxpayer that is subject to the same graduated rates of tax as any individual in Canada. So what? This means that any income earned on the insurance proceeds in the trust can be taxed in the hands of the trust rather than being added to the income of the beneficiary personally. Where the beneficiary has other income, you'll effectively multiply the number of dollars taxed in the lowest marginal tax brackets, which will save tax.
4. Avoid probate fees on insurance proceeds:
Designating a beneficiary for your life insurance proceeds will keep those dollars out of your estate, and will minimize probate fees, which is just another tax levied by most provinces upon your death. Using an insurance trust to hold those proceeds does not mean giving up that minimization of probate fees provided the beneficiary designation in your will is worded properly. A lawyer with experience in drafting these provisions will understand the language to use.
5. Privacy can be attained:
If you're concerned about privacy and prefer the terms of the trust to be outside the purview of the beneficiaries of your estate, this can be accomplished. It'll require drafting the beneficiary designation outside of your will. But where privacy is important to you, the same benefits can be accomplished by drafting the provisions differently.
6. Preserve provincial disability benefits:
If a particular beneficiary is eligible for certain disability plan payments in some provinces, the testamentary insurance can be set up to ensure that the beneficiary can still meet the requirements of your province that will entitle him to receive these payments [see the court decision in Ontario (Ministry of Community & Social Services) v. Henson (1989)]
In all of this, consult a lawyer with experience - particularly in Quebec, where things work a little differently than the common-law provinces.
Tim Cestnick