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 trustsHow to maintain control of the distribution of estate funds after death using trusts Using Life Insurance TrustsUsing Life Insurance Trusts

Basic Estate Planning Estate Will Joint Property (with right of survivorship Surviving Joint Owner Asset with Named Beneficiary Named Beneficiary

Basic Estate Planning All Assets that are not jointly held or have a named beneficiary form part of the estateAll 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 forWill 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 deathWill allows for control after death

Solutions for Control Estate Will Life Insurance Policy Estate is Named Beneficiary Subject to creditors and claimants

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 tax- free to do with as they pleaseThe named beneficiary will receive the full life insurance proceeds tax- free to do with as they please BUT what if you want to attach conditions to the proceeds, thereby controlling the life insurance funds?BUT what if you want to attach conditions to the proceeds, thereby controlling the life insurance funds?

Basic Estate Planning Estate Will Life Insurance Policy Named Beneficiary Subject to creditors and claimants

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 distributedIf 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????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?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?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 minorsBeneficiary 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 Estate Will Life Insurance Policy Subject to creditors and claimants Life Insurance Trust Named Beneficiary

Trusts – Back to the Basics Three certainties to a trustThree certainties to a trust –Intention –Certainty regarding property and terms –Clear identification of objects or beneficiaries of the trust Parties to a trustParties 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 rateUndistributed income is taxed at highest marginal tax rate –Testamentary trusts Undistributed income is taxed at graduated tax ratesUndistributed income is taxed at graduated tax rates

Trusts – Back to the Basics Settling a TrustSettling 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 Life Insurance Trust Settlor Insurance Trustee Beneficiaries of Insurance Proceeds

Life 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 proceeds on behalf of the beneficiary and distribute according to the terms of the Life Insurance Trust DeclarationInsurance 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 ProtectionCreditor Protection BewareBeware –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 TrustsPractical uses for Life Insurance Trusts –Spendthrift – Income splitting – Minor children – Confidential beneficiary – Second Marriages

Solutions for Control Practical InformationPractical Information –Separate Life Insurance Trust Declaration ConfidentialityConfidentiality Does not get revoked when a new will preparedDoes not get revoked when a new will prepared –Declaration as part of the Will Location importantLocation important Identify policy and policy numbersIdentify policy and policy numbers

Other Solutions Ownership PlanningOwnership Planning –Own a life insurance policy on someone else’s life –Own a joint policy (last-to-die)

Questions and Discussion