Timely template letter: Introducing insurance trusts

(August 2005) Many of your clients may already have some form of life insurance to help their families pay the bills should anything ever happen to them. But they may be concerned about the consequences of having those funds paid into their beneficiary’s bank account. Use this template letter to introduce them to the concept of insurance trusts and let them know that you can help.

Dear [Client’s name],

Like many people, you may have already obtained some form of life insurance to help your family pay the bills should anything ever happen to you. But have you considered the consequences of having those funds paid into your beneficiary’s bank account? In some cases, setting up a testamentary insurance trust might be preferable to making a direct payment. Consider the following scenarios:

Competency

Is your beneficiary able to make good financial decisions? Once someone receives a direct insurance payment, that money is free to spend as the beneficiary likes — funds that were meant to last decades might be squandered in years. If your direct beneficiary is still a child, she would be unable to receive the funds. The courts would step in and manage the funds on her behalf.

Paying the insurance money into a trust puts you back in control, allowing you to name trustworthy people to manage the funds for your beneficiaries.

Disability

Disabled beneficiaries who receive insurance proceeds could be disqualified from receiving the government benefits they had previously enjoyed. They would only become eligible again after all the money you had left behind was used up.

Depending on your province, a special “Henson” type trust may prevent this from happening ? your beneficiary will still receive government benefits, but will also have access to the funds in the trust.

Taxation

If your spouse already has savings and/or another source of income, they could end up paying unnecessarily high taxes on the income they earn from your insurance payment. Here’s an example¹ to illustrate the point:

Joe already has an income of $60,000 a year. He receives an insurance payment of $200,000, which he invests at 6% — earning another $12,000 for a total income of $72,000. He’ll face about $17,800 in taxes.

What if that $200,000 were paid into a testamentary trust, where it would be taxed separately? There would be a tax of about $13,700 on Joe’s $60,000 income. The trust would only pay a tax of about $700 on its $12,000 income. The total tax payable is reduced to just $14,400 — saving him $3,400 every year!

If you’d like to learn more about how trusts can be used to better manage your life insurance payments, please don’t hesitate to contact me.

Sincerely,

[Your signature]

[Your name]

¹Using rates payable by an Ontario resident for 2005, rounded to the nearest hundred.