solutions to maintain control using life insurance trusts dawn hawley, cfp, r.f. p., tep, cdfa...

Solutions to Maintain Control Solutions to Maintain Control Using Life Insurance TrustsUsing Life Insurance Trusts

Dawn Hawley, CFP, R.F. P., TEP, CDFADawn Hawley, CFP, R.F. P., TEP, CDFA

Monday, June 11, 2007Monday, June 11, 2007

CIFPs National Conference 2007CIFPs National Conference 2007

The following information is being presented on The following information is being presented on the understanding that it is for information the understanding that it is for information purposes only. Neither ATB Financial or its purposes only. Neither ATB Financial or its subsidiaries nor the presenter have been subsidiaries nor the presenter have been engaged for the purpose of providing legal, engaged for the purpose of providing legal, accounting, taxation or other professional advice. accounting, taxation or other professional advice. No one should act upon the No one should act upon the examples/information without a thorough examples/information without a thorough examination of the legal/tax situation with their examination of the legal/tax situation with their own professional advisors, after the facts of the own professional advisors, after the facts of the specific case are considered.specific case are considered.

Learning Objectives Learning Objectives

• How to maintain control of the How to maintain control of the distribution of estate funds after death distribution of estate funds after death using trustsusing trusts

• Using Life Insurance TrustsUsing Life Insurance Trusts

Basic Estate PlanningBasic Estate Planning

Estate Will

Joint Property (with right of survivorship

Surviving Joint Owner

Asset with Named Beneficiary

Named Beneficiary


• All Assets that are not jointly held or All Assets that are not jointly held or have a named beneficiary form part have a named beneficiary form part of the estateof the estate– Distributed according to the terms of Distributed according to the terms of

the Will or Intestate Successionthe Will or Intestate Succession– Will can contain clauses to hold funds Will can contain clauses to hold funds

“in trust” under specific conditions “in trust” under specific conditions

Solutions for ControlSolutions for Control

• Will can also provide forWill can also provide for– Name an executorName an executor– Additional powers for executorsAdditional powers for executors– Name guardian for minorsName guardian for minors– Extend conditions under which estate Extend conditions under which estate

proceeds are distributedproceeds are distributed

• Will allows for control after deathWill allows for control after death


Estate Will

Life Insurance

Policy Estate is Named Beneficiary

Subject to creditors and claimants


All assets that form part of the estate All assets that form part of the estate may be:may be:

– Subject to creditors/claimantsSubject to creditors/claimants– Subject to probate costsSubject to probate costs– Subject to probate processSubject to probate process


Using a beneficiary designation for Using a beneficiary designation for life insurance proceeds can be an life insurance proceeds can be an effective estate planning tooleffective estate planning tool

– By-passes the “estate” process By-passes the “estate” process including probate costsincluding probate costs

– Proceeds not available for creditors and Proceeds not available for creditors and claimantsclaimants


• The named beneficiary will receive The named beneficiary will receive the full life insurance proceeds tax-the full life insurance proceeds tax-free to do with as they pleasefree to do with as they please

• BUT what if you want to attach BUT what if you want to attach conditions to the proceeds, thereby conditions to the proceeds, thereby controlling the life insurance funds? controlling the life insurance funds?


Estate Will

Life Insurance

PolicyNamed Beneficiary



• If the life insurance proceeds flow to the If the life insurance proceeds flow to the Estate, then the Will can contain conditions Estate, then the Will can contain conditions on how the proceeds are to be distributedon how the proceeds are to be distributed

• Is flowing the proceeds through the Estate Is flowing the proceeds through the Estate via the Will, the only solution to control the via the Will, the only solution to control the distribution of funds????distribution of funds????


• Can you use a trust outside of the Can you use a trust outside of the Estate to control the distribution of Estate to control the distribution of life insurance proceeds?life insurance proceeds?

• Is that the same as naming a Trustee Is that the same as naming a Trustee for a minor beneficiary on a Life for a minor beneficiary on a Life Insurance Beneficiary Declaration?Insurance Beneficiary Declaration?


• Beneficiary Form only provides for Beneficiary Form only provides for Trustee for minorsTrustee for minors– What about spendthrift beneficiaries?What about spendthrift beneficiaries?– Can you use the proceeds for the Can you use the proceeds for the

benefit of minor children?benefit of minor children?– What about income splitting What about income splitting

opportunities for a spouse/common-law opportunities for a spouse/common-law partner?partner?


Estate Will

Life Insurance

Policy


Life Insurance

TrustNamed Beneficiary

Trusts – Back to the BasicsTrusts – Back to the Basics

• Three certainties to a trustThree certainties to a trust– IntentionIntention– Certainty regarding property and termsCertainty regarding property and terms– Clear identification of objects or beneficiaries Clear identification of objects or beneficiaries

of the trustof the trust

• Parties to a trustParties to a trust– SettlorSettlor– TrusteeTrustee– BeneficiariesBeneficiaries


Testamentary TrustTestamentary Trust– “…“…means a trust or estate that arose on means a trust or estate that arose on

and as a consequence of the death of and as a consequence of the death of an individual…”an individual…”

Inter Vivos TrustInter Vivos Trust– ““a trust other than a testamentary trust”a trust other than a testamentary trust”

(created during the lifetime of the settlor)(created during the lifetime of the settlor)


Taxation of TrustsTaxation of Trusts– Inter Vivos trusts Inter Vivos trusts • Undistributed income is taxed at Undistributed income is taxed at

highest marginal tax ratehighest marginal tax rate– Testamentary trustsTestamentary trusts• Undistributed income is taxed at Undistributed income is taxed at

graduated tax ratesgraduated tax rates


• Settling a TrustSettling a Trust– Initial amount contributed to establish the trustInitial amount contributed to establish the trust– If the trust is “settled” prior to death, then it If the trust is “settled” prior to death, then it

would be an Inter Vivos Trustwould be an Inter Vivos Trust– CRA does not consider the mere designation CRA does not consider the mere designation

of a beneficiary of a life insurance policy to be of a beneficiary of a life insurance policy to be transfer of property so the designation of a transfer of property so the designation of a beneficiary would NOT settle a trustbeneficiary would NOT settle a trust


Life InsuranceTrust

Settlor

Insurance Trustee

Beneficiaries of Insurance Proceeds

Life Insurance - BasicsLife Insurance - Basics

• Insured – owner of the insurance contractInsured – owner of the insurance contract• Life insured – person whose life is insuredLife insured – person whose life is insured• Beneficiary – who is entitled to proceedsBeneficiary – who is entitled to proceeds• Insurance Trustee – who will look after the Insurance Trustee – who will look after the

proceeds on behalf of the beneficiary and proceeds on behalf of the beneficiary and distribute according to the terms of the distribute according to the terms of the Life Insurance Trust DeclarationLife Insurance Trust Declaration


Creditor Protection – Provincial legislationCreditor Protection – Provincial legislation

– “…“…while a designation in favour of a spouse or while a designation in favour of a spouse or adult interdependent partner, child, grandchild adult interdependent partner, child, grandchild or parent, or any of them, of a person whose or parent, or any of them, of a person whose life is insured is in effect, the insurance money life is insured is in effect, the insurance money and the rights and interests of the and the rights and interests of the insuredinsured in in the insurance money and in the contract are the insurance money and in the contract are exempt from writ proceedings…”*exempt from writ proceedings…”*

*Alberta Insurance Act*Alberta Insurance Act


Creditor Protection – Provincial legislationCreditor Protection – Provincial legislation

– “… “… when a beneficiary is designated the when a beneficiary is designated the insurance money, from the time of the insurance money, from the time of the happening of the event on which the insurance happening of the event on which the insurance money becomes payable, is not part of the money becomes payable, is not part of the estate of the insured and is not subject to the estate of the insured and is not subject to the claims of the creditors of the claims of the creditors of the insuredinsured …”* …”*

*Alberta Insurance Act*Alberta Insurance Act


• Creditor ProtectionCreditor Protection

• BewareBeware– You can lose this valuable protection if You can lose this valuable protection if

a transaction is characterized as being a transaction is characterized as being intended to hinder or delay creditors – intended to hinder or delay creditors – the transaction can be set aside as a the transaction can be set aside as a fraudulent conveyance!!!fraudulent conveyance!!!


• Practical uses for Life Insurance Practical uses for Life Insurance TrustsTrusts– SpendthriftSpendthrift– Income splittingIncome splitting– Minor childrenMinor children– Confidential beneficiaryConfidential beneficiary– Second MarriagesSecond Marriages


• Practical InformationPractical Information– Separate Life Insurance Trust Separate Life Insurance Trust

DeclarationDeclaration• ConfidentialityConfidentiality• Does not get revoked when a new will Does not get revoked when a new will

preparedprepared

– Declaration as part of the WillDeclaration as part of the Will• Location importantLocation important• Identify policy and policy numbersIdentify policy and policy numbers

Other SolutionsOther Solutions

• Ownership PlanningOwnership Planning– Own a life insurance policy on someone Own a life insurance policy on someone

else’s lifeelse’s life– Own a joint policy (last-to-die)Own a joint policy (last-to-die)

Questions and Questions and DiscussionDiscussion

solutions to maintain control using life insurance trusts dawn hawley, cfp, r.f. p., tep, cdfa...

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