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Insurance Trust

An Insurance Trust is a testamentary trust created at death to receive life insurance proceeds. Why would someone want to set one up? Isn’t the benefit of life insurance that if you die and name a beneficiary or beneficiaries, the proceeds pass tax-free and probate-free to them? That presumably is the intention.

Let us take a couple, Sanjay and Mira. Sanjay heads IT at a medium-size company and Mira runs a thriving human resources company. Both earn good incomes and have 2 children, Karim who is 8 and Orly who is 6. The coronavirus pandemic has made them realize they are woefully underinsured and with the help of their advisor, each of Sanjay and Mira takes out a policy for $1,000,000 each of 20-year term life insurance. They name each other as beneficiaries, with Karim and Orly named as secondary or contingent beneficiaries. Mira’s sister, Beth, has been named in Mira and Sanjay’s Wills as guardian, so on the life insurance policies, she is named as the trustee for the two children.

Eight years after the policies are taken out Sanjay and Mira are killed in an accident. Beth receives a total of $2,000,000 to be held in trust for Karim and Orly. She uses some of the funds for their education and extra-curricular activities and also buys a larger vehicle to accommodate her new family. But most of the money is set aside.

A few years later at university, while taking a law course, Karim learns that as he is of the age of majority, he is entitled to his insurance proceeds. He petitions for and receives them. Hearing this, Orly does the same. You now have a 21 and a 19-year-old each with $1,000,000. Had the proceeds been paid to an insurance trust, the dictates of the trust could have dispensed the income over a longer period of time protecting both the assets and the children.

What if only one spouse died? How would an insurance trust benefit the survivor? Let’s say Sanjay dies and Mira receives his benefit. As the trust would be taxed at the top bracket, there is no tax advantage. However, the assets are protected from creditors. And should Mira marry again and have that marriage fail, the trust assets would not form part of her marital assets.

There may be other advantages to setting up a testamentary trust, including privacy protection. In separation or divorce, using a trustee might be better than naming an ex-spouse as a beneficiary or as a trustee for the children.

An insurance trust can be created by declaring it in a will, in a separate trust document or naming it as the beneficiary in the contract, by referencing trust provisions in a will. With any of these options, seek advice from a lawyer and an insurance professional.


Francine Dick, CFP, EPC | Financial Advisor    

Carte Wealth Management Inc. | Mutual Fund Dealer

Carte Risk Management Inc. | Insurance Managing General Agency

425-6755 Mississauga Road, Mississauga, Ontario, L5N 7Y2

C: (647)897-6471 | TF: 1-866-842-2783 | F: (905)238-8197 | E: francine.dick@cartewm.com



Be sure to read about Creating an Estate Plan

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This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.