What you can do to protect them
Most people would shudder at the thought of their children inheriting large sums of money early in life. Education and career plans can be drastically altered if a young person comes into a significant amount of money. For this reason, many people establish trusts for their children in their Wills. These trusts generally provide for the support and education needs to be paid out of the fund established by the trust, with a distribution of remaining funds when the child attains a certain age, usually 25 or older.
How many of us do the same with our insurance policies? Most of us have life insurance policies and most of us have made beneficiary designations – often a partner or spouse. Other times, however, we name children as beneficiaries of the insurance proceeds, whether as an alternate choice to our spouse or as the primary beneficiary in those situations where there either is no spouse or where we specifically wish to provide for our children.
One of the main benefits of naming a beneficiary under an insurance policy is to provide for payment of insurance proceeds directly to the beneficiary, thereby bypassing the deceased’s estate and avoiding the payment of probate fees (estate administration tax) and the potential claims of creditors. However, insurance proceeds payable to a minor must be paid into Court and are not payable to the beneficiary until he or she reaches the age of majority. While these funds are in Court, there are limited investment opportunities and they are difficult to access for the care and support of the beneficiary or if the estate trustee chooses to make a partial distribution to the beneficiary. To avoid this result it is recommended that an insured establish an insurance trust. An insurance trust can be arranged by way of an insurance declaration or within the insured’s Will. When such documents are properly prepared, the insurance proceeds payable upon death are paid into a trust, the terms of which will govern periodic payments to the beneficiaries and the final distribution of the proceeds. The trust is not considered part of the deceased’s estate and accordingly, the insurance proceeds bypass the estate and are subject to payment of probate fees. The trustee of the insurance trust will be designated in the insurance declaration and can be the same person(s) named as the executor.
While children and young adults are the most common reason for setting up an insurance trust, there are other reasons where these types of trust are beneficial. Insurance trusts can be very practical, for example, for funding support obligations with insurance proceeds, to provide for a beneficiary with special needs or as a means of dividing insurance proceeds between a current spouse and children from a former marriage.
It is recommended that everyone review from time to time their beneficiary designations on all life insurance policies as well as the terms of their Wills. If named beneficiaries under your insurance policies are not old enough to handle the responsibility of a large sum of money, an insurance trust may be a mechanism which should be considered.