‍Tips and Traps

Life Insurance Declarations and Life Insurance Trusts are often a matter of confusion for those who don’t specialize in life insurance. Jordan Atin and Ian Hull discussed Life Insurance Declarations and Life Insurance Trusts in a two-part eState Planner Academy’s webinar.  

This week's blog focuses on some of the tips and traps for practitioners dealing with Life Insurance Declarations and Life Insurance Trusts as part of a client’s overall estate plan.  

Life Insurance is often an important component of a client’s overall estate plan, lawyers should be aware of the following key facts when advising clients about this valuable asset:

1. Beneficiary designations on life insurance policies that keep proceeds out of the estate can avoid probate tax if kept out of the estate, provide creditor proofing, allow quick access to proceeds, and provide some privacy.  However, designating a beneficiary outside of the estate can complicate the overall estate plan by undermining the estate planning goals, reducing funds available to pay estate taxes.

2. An owner of an insurance plan may designate a beneficiary, their estate, or a trustee for a beneficiary by a “Declaration”.

3. A “Declaration” is an instrument signed by the owner (not the life insured) of the contract that identifies the contract or fund. No witnesses are required. It can even be done electronically. 

4. It is important to sufficiently identify the insurance - it is best practice to specify the insurance policy number (don’t say “all my life insurance policies”).

5. There is no specific form for a Declaration, it can be done with the insurance advisor, through a Will or a separate Declaration outside of the Will. 

6. A “Declaration” can be used to name a beneficiary, the “estate” or a trustee for a beneficiary. 

7. Class gifts should be avoided for insurance designations - use specific beneficiary’s names. Insurance companies will not try to figure out the members of a particular class.

8. Where the “Estate” is the designated beneficiary, it may be possible to avoid probate (Rozon Estate v. Transamerica Life Insurance Company of Canada, [1999] O.J. No. 4538, 1999 CarswellOnt 4391(C.A.)), although in most cases probate will likely be required.  

9. If minors are designated directly, proceeds will have to be paid into Court.

10. Declarations do not cover future policies that are not in existence (or described) in the Declaration.

11. The insurance company should be notified of the new designation because if not, they can pay out insurance proceeds to whoever they have on record. 

12. A new Will would revoke the previous Will along with any Insurance Declaration in that Will, so it is important to ask for copies of previous Wills to see whether new Declarations are necessary.

13. Testamentary Trusts created by Insurance Declaration 

• An Insurance Declaration that designates a trustee and creates a testamentary Insurance Trust can allow for a more complex distribution of insurance proceeds while keeping the proceeds out of the estate and avoiding the requirement for probate.  This is helpful for specific giftovers.  
• A separate Insurance Declaration that keeps proceeds out of the Estate may not allow for insurance proceeds to be available to fund gifts of the Estate, but is private, can separately be sent to the insurance company, should not be revoked by a subsequent Will.

14. Insurance Declaration in the Will document 

• Be clear that it’s a “Declaration” and not part of the Will itself, 
• Include it before the “vesting” clause at the beginning, don’t make it a legacy in the Will.  
• Risk of proceeds being treated as part of the estate (Carlisle Estate (Re), 2007 SKQB 435 (CanLII)

15. When drafting an Insurance Declaration:

• Do not use reference “my Trustees”- name them specifically
• Set out distributive provisions
• Consider whether to repeat administrative provisions or reference the terms of the  Will.

16. Separation Agreements should be clear about intentions regarding insurance proceeds and their use (ie. if held to pay child support, what happens to any excess or shortfall).

17. Reporting

• If an Insurance Declaration was prepared
• ~Specify that it applies only to current policies named, 
• ~Updates will be needed for new or changed policies, and 
• ~Client should send a copy to the insurance company.  
• If no Insurance Declaration was prepared
• ~Confirm the client is responsible for ensuring valid beneficiary designations
• ~Highlight the benefits of using Declarations and recommend regular review. 

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eState Planner Academy hosts advanced topic webinars every Thursday at 12:30 (ET). You can sign up for free CPD credits here:  

https://landing.e-stateplanner.com/en-ca/e-state-webinar

To watch a recordings of this webinar, you can register here:  

https://landing.e-stateplanner.com/life-insurance-declarations

https://landing.e-stateplanner.com/life-insurance-declarations-part-2