Three Reasons for a Life Insurance Trust in British Columbia

If you own a life insurance policy consider creating a trust and designating a trustee to distribute the proceeds instead of designating the beneficiaries directly or designating your estate. There are at least three good reasons for using a trust.

First, a trust offers greater flexibility than naming a beneficiary directly. For example, you may wish for the insurance proceeds to go to your spouse if he or she outlives you. But, if your spouse dies first, you want the insurance proceeds to go to your children. If a child also dies before you, it may be desirable to provide that the child’s share goes to the deceased’s child’s own children. This relatively simple and common distribution is difficult to accomplish by naming the beneficiaries on the insurance designation forms. You could name your spouse, with your children as alternate beneficiaries, but this does not provide for grandchildren if one of your children dies before you. Or you could name your spouse as the sole beneficiary, and if he or she dies before you, the insurance proceeds would go to your estate. You could then provide for your children and grandchildren in your will. However, you may prefer to keep the insurance proceeds out of your estate for the reasons discussed below.

Second, if you use a trust designation instead of designating your estate as the beneficiary, you can save probate fees by keeping the insurance proceeds out of your estate. When your executor probates your will, he or she has to pay probate fees calculated on the value of the estate assets. Because in a properly drawn trust designation, the insurance proceeds do not form part of your estate, the proceeds will not be considered for the purpose of calculating probate fees.

Third, by keeping the insurance proceeds out of your estate, it is more difficult for anyone who wishes to challenge your will or make a claim against your estate to successfully claim the insurance proceeds. For example, in British Columbia, under the Wills Variation Act, RSBC 1996, c. 490, a spouse or child may ask the court to vary your will on the grounds that you have not made adequate provision for the spouse or child. However, the Wills Variation Act does not currently provide the court with the power to vary a life insurance trust designation. A person claiming under the Wills Variation Act would also have to persuade a court that there is a legal basis for setting aside the insurance trust designation so that the insurance proceeds fall into the estate. Setting aside an insurance trust is difficult.