If you’ve designated one of your children to be a beneficiary to receive insurance proceeds upon your death then you’re likely well aware of the many benefits. The most notable being that the proceeds will bypass the estate and be protected from creditors.
However, if you’re not careful there are also potential pitfalls particularly when your child is a minor.
For instance, assuming you have a will and have made provisions to ensure that your child’s portion of your estate be distributed to them in staggered stages over the course of their lifetime many are unaware that life insurance proceeds do not form the estate. Thus, when your child turns 18 years old, depending on the size of your insurance coverage, you may have unintentionally sabotaged your estate planning objectives as your child may now be in receipt of a huge sum of money which they are not likely responsible enough to manage.
Moreover, consider the scenario where one parent passes away and the surviving parent may need access to the insurance proceeds in order to provide adequate care for their child. If the beneficiary designation is simply in the child’s name, then the proceeds would be payable to the court, invested at a prescribed rate of interest and held on to until the child is 18 years old. Again, if not planned correctly, this may undermine both parents estate plan and when the child does become of age, then they would run into same issue in the previous scenario if left unattended as the entire amount would be payable to the 18 year old. It should be noted that if the proceeds are paid to the courts, then a legal custodian of the minor can request payments out of the court for the child’s expenses, however, this is can burdensome and surviving parents may resort to having to prove that they are the legal guardian of that child’s property.
A solution to the latter issue is in the appointment of a trustee. In Ontario, according to the Children’s Law Reform Act, in order for the death benefit be received on behalf of the child then an individual need be appointed trustee or guardian of that child’s property.
A trustee is typically named on your life insurance declaration. Once a trustee is named under the Insurance Act, they will be subject to the Trustee Act of Ontario, trust law and the terms set out in the trust declaration.
In a follow up article we will discuss the duties of a trustee, for now though it is important to recognize that trustees have an obligation to provide a standard of care to your minor beneficiary until they become of age and receive the balance of the funds held in trust. While they are a minor the trustee is obligated to preserve the proceeds and invest them in authorized investments only exercising ordinary prudence. This individual may even be held liable for any losses to the trust if they are making unauthorized investments or direct the proceeds of the trust for personal benefit.
Your trustee will be able to exercise their own discretion to provide funds out of the trust necessary for maintenance and education until your child reaches 18.
If you own a life insurance policy and have minor beneficiaries in your designation and are unclear if you’ve appointed a trustee in your policy, contact your life insurance advisor immediately and begin the process to review your beneficiary designation to get your insurance policy in sync with your estate plans.
If you have any questions about this article or would like the assistance of one of our licensed professionals, please call us at 1.416.759.5453 or email us at info@lilandinsurance.com.
NOTE: The information presented here is for your information only. Liland Insurance Inc. does not provide legal, accounting, taxation or other professional advice to advisors or their clients. Always seek advice from a qualified professional including a thorough examination of your specific legal/tax situation.