Worried About Beneficiaries? Protect Insurance Proceeds With a Trust

Did you know that a life insurance trust can help ensure your wealth supports your beneficiaries the way you intend?

Today, many high-net-worth investors are planning beyond simply passing on wealth; they want to protect it for future generations. The old “shirtsleeves to shirtsleeves in three generations” adage captures the risk: The first generation builds wealth through hard work, the second generation inherits and enjoys it and the third generation often loses it, returning to “shirtsleeves.”

While tools like testamentary trusts have long been used for intergenerational planning, fewer people realize that trusts can also help safeguard life insurance proceeds.

Why Naming a Beneficiary May Not Be Enough

When you purchase a life insurance policy, choosing a beneficiary is one of the more important decisions you need to make. But in some cases, you may not want the intended beneficiary to receive the proceeds directly. In these instances, a life insurance trust can be named as the policy’s beneficiary instead of the individual. The insurance proceeds are then paid to a trustee, appointed in your will or in a separate trust agreement, who manages and distributes the funds according to your instructions.

A life insurance trust allows for the same benefits as naming an individual beneficiary, including privacy, speed of access to funds upon death, and avoidance of probate (in provinces where applicable). Yet, it also offers added control and protection, making it a compelling estate planning tool for some.

When a Life Insurance Trust Makes Sense

Here are some reasons why it may make sense: ‍

• Enhanced Control — If a beneficiary needs guidance or support because they aren’t ready or able to responsibly manage a large sum of money, a trust can allow you to set the timing and manner of distributions, ensuring funds are used as you intend.
• Creditor Protection — Assets held in the trust may offer some protection from creditors of both the estate and the beneficiary.
• Support for Children — Minor children are generally not legally entitled to directly receive life insurance proceeds. Without a trust, insurance proceeds could be paid to a public trustee, and court approval may be required to make payments to the minor, or be held until they reach the age of majority. Often, when a beneficiary receives a large, lump-sum payout immediately, such as upon reaching the age of majority, they aren’t ready to handle a significant amount. A trust can help ensure funds are managed until the child is ready, avoiding court involvement and protecting against misuse.
• Protecting Disabled Beneficiary Benefits — A trust containing special terms may provide ongoing financial support to beneficiaries receiving provincial disability benefits without jeopardizing their eligibility for income- or asset-tested assistance programs.
  

A life insurance trust is a risk management tool that can help protect a legacy and position your wealth to benefit those you care about in the way you intend. To learn more, please call the office and we can help connect you with specialists who can assist.

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