Transcript Overall Title Goes here

Solutions to Maintain Control
Using Life Insurance Trusts
Dawn Hawley, CFP, R.F. P., TEP, CDFA
Monday, June 11, 2007
CIFPs National Conference 2007
The following information is being presented on
the understanding that it is for information
purposes only. Neither ATB Financial or its
subsidiaries nor the presenter have been
engaged for the purpose of providing legal,
accounting, taxation or other professional advice.
No one should act upon the examples/information
without a thorough examination of the legal/tax
situation with their own professional advisors,
after the facts of the specific case are considered.
Learning Objectives
• How to maintain control of the
distribution of estate funds after
death using trusts
• Using Life Insurance Trusts
Basic Estate Planning
Joint Property
(with right of survivorship
Surviving
Joint Owner
Asset with
Named Beneficiary
Named
Beneficiary
Estate
Will
Basic Estate Planning
• All Assets that are not jointly held or
have a named beneficiary form part
of the estate
– Distributed according to the terms of
the Will or Intestate Succession
– Will can contain clauses to hold funds
“in trust” under specific conditions
Solutions for Control
• Will can also provide for
– Name an executor
– Additional powers for executors
– Name guardian for minors
– Extend conditions under which estate
proceeds are distributed
• Will allows for control after death
Solutions for Control
Life
Insurance
Policy
Estate is Named Beneficiary
Estate
Subject to creditors and claimants
Will
Solutions for Control
All assets that form part of the estate
may be:
– Subject to creditors/claimants
– Subject to probate costs
– Subject to probate process
Solutions for Control
Using a beneficiary designation for
life insurance proceeds can be an
effective estate planning tool
– By-passes the “estate” process
including probate costs
– Proceeds not available for creditors and
claimants
Solutions for Control
• The named beneficiary will receive
the full life insurance proceeds taxfree to do with as they please
• BUT what if you want to attach
conditions to the proceeds, thereby
controlling the life insurance funds?
Basic Estate Planning
Life
Insurance
Policy
Named Beneficiary
Estate
Subject to creditors and claimants
Will
Solutions for Control
• If the life insurance proceeds flow to the
Estate, then the Will can contain
conditions on how the proceeds are to be
distributed
• Is flowing the proceeds through the Estate
via the Will, the only solution to control
the distribution of funds????
Solutions for Control
• Can you use a trust outside of the
Estate to control the distribution of
life insurance proceeds?
• Is that the same as naming a Trustee
for a minor beneficiary on a Life
Insurance Beneficiary Declaration?
Solutions for Control
• Beneficiary Form only provides for
Trustee for minors
– What about spendthrift beneficiaries?
– Can you use the proceeds for the
benefit of minor children?
– What about income splitting
opportunities for a spouse/common-law
partner?
Solutions for Control
Life
Insurance
Policy
Named Beneficiary
Estate
Subject to creditors and claimants
Life
Insurance
Trust
Will
Trusts – Back to the Basics
• Three certainties to a trust
– Intention
– Certainty regarding property and terms
– Clear identification of objects or beneficiaries
of the trust
• Parties to a trust
– Settlor
– Trustee
– Beneficiaries
Trusts – Back to the Basics
Testamentary Trust
– “…means a trust or estate that arose on
and as a consequence of the death of
an individual…”
Inter Vivos Trust
– “a trust other than a testamentary trust”
(created during the lifetime of the settlor)
Trusts – Back to the Basics
Taxation of Trusts
– Inter Vivos trusts
• Undistributed income is taxed at
highest marginal tax rate
– Testamentary trusts
• Undistributed income is taxed at
graduated tax rates
Trusts – Back to the Basics
• Settling a Trust
– Initial amount contributed to establish the trust
– If the trust is “settled” prior to death, then it
would be an Inter Vivos Trust
– CRA does not consider the mere designation
of a beneficiary of a life insurance policy to be
transfer of property so the designation of a
beneficiary would NOT settle a trust
Trusts – Back to the Basics
Beneficiaries of
Insurance Proceeds
Settlor
Life Insurance
Trust
Insurance Trustee
Life Insurance - Basics
•
•
•
•
Insured – owner of the insurance contract
Life insured – person whose life is insured
Beneficiary – who is entitled to proceeds
Insurance Trustee – who will look after the
proceeds on behalf of the beneficiary and
distribute according to the terms of the
Life Insurance Trust Declaration
Life Insurance - Basics
Creditor Protection – Provincial legislation
– “…while a designation in favour of a spouse or
adult interdependent partner, child, grandchild
or parent, or any of them, of a person whose
life is insured is in effect, the insurance money
and the rights and interests of the insured in
the insurance money and in the contract are
exempt from writ proceedings…”*
*Alberta Insurance Act
Life Insurance - Basics
Creditor Protection – Provincial legislation
– “… when a beneficiary is designated the
insurance money, from the time of the
happening of the event on which the insurance
money becomes payable, is not part of the
estate of the insured and is not subject to the
claims of the creditors of the insured …”*
*Alberta Insurance Act
Life Insurance - Basics
• Creditor Protection
• Beware
– You can lose this valuable protection if
a transaction is characterized as being
intended to hinder or delay creditors –
the transaction can be set aside as a
fraudulent conveyance!!!
Solutions for Control
• Practical uses for Life Insurance
Trusts
– Spendthrift
– Income splitting
– Minor children
– Confidential beneficiary
– Second Marriages
Solutions for Control
• Practical Information
– Separate Life Insurance Trust
Declaration
• Confidentiality
• Does not get revoked when a new will
prepared
– Declaration as part of the Will
• Location important
• Identify policy and policy numbers
Other Solutions
• Ownership Planning
– Own a life insurance policy on someone
else’s life
– Own a joint policy (last-to-die)
Questions and
Discussion