LIFE INSURANCE AND TRUSTS: EVERYTHING YOU NEED TO KNOW
One crucial aspect of estate planning that is always overlooked is the strategic placement of life insurance. My clients often ask me if they should move their life insurance to their Family Trust once it is set up, and I answer with a resounding, “Yes!”
My reason for this is the same as why I advise clients not to have any property investments in their own name but rather in their trusts. When life insurance pays out to an individual, it becomes a big asset in the name of that individual, which is what we try to avoid.
Watch our YouTube video, Why You Need to Have a Separate Family Trust.
Navigating life insurance in your estate planning
Life insurance is often taken out to create liquidity in an estate or, in other words, make cash available to pay for costs on death. Most people don’t want their spouse or family to have to sell assets (and possibly become distressed sellers) to make enough cash available to pay for costs such as estate duty, capital gains tax, executor’s fees, and other expenses in the estate.
One of the main purposes of trust structuring is estate planning and to prevent all these costs on death. If you structure your assets correctly in your Family Trust and your investment properties in a property company or companies under your Holdings Trust, you can avoid costs like estate duties, transfer fees, etc. If structured correctly, you will have a very small estate, and you won’t need much liquidity in your estate.
Read our article, Why You Need At Least Two Trusts and How to Use Them Correctly.
Where should life insurance payouts go?
To avoid the costs mentioned above, any life insurance you take out on your life should rather pay out to a Family Trust. And if you have taken out life insurance on someone else, you rather want it to pay out to the Family Trust than to you. When life insurance is paid out to the Family Trust, distributions can be made to any of the trust’s beneficiaries that may require funds.
The life insurance policy that pays out to your Family Trust can be paid as a loan from the Family Trust to your property company (via your Holdings Trust) to settle mortgage bonds or create liquidity in your property company or companies. My preference, if at all possible, is to keep the bonds open in the property company or companies when you pass away and to pay the funds you have made available through life insurance in your Family Trust into the access bonds to reduce your outstanding debt on which interest is charged. This can reduce your monthly bond payments, improving cash flow and still keeping funds available to buy more properties or repay your loan to your Family Trust (via your Holdings Trust). For more on this, read our article on How to Use an Access Bond.
The benefits of a trust-owned life insurance policy include:
- Having no executor’s fees on the life insurance,
- Creating liquidity that can be paid towards the property portfolio in the property company or companies with the shares held in the Holdings Trust or that can be paid to any of the beneficiaries,
- Creating continuity because these funds can be kept in a Family Trust for multiple generations with minimum costs,
- Protecting those funds that are paid out since they do not pay out to an individual, and
- Ample tax benefits over and above that.
Sadly, most people are unaware of the benefits of having your life insurance in a trust.
Let your Family Trust be the beneficiary and payer of your life insurance
Your Family Trust can and should be the beneficiary of a life insurance policy and the payer of the policy. Here’s why. Payouts from a life insurance policy are deemed assets or deemed property in an estate and are subject to estate duty taxes irrespective of who the life insurance pays out to.
However, if your life insurance pays out to your spouse, there will be no estate duty, but estate duty will be triggered on everything your spouse owns when they die. So, having life insurance pay out to your spouse is not the solution as your spouse’s estate is only growing. Therefore, it is ideal to rather have the life insurance pay out to the Family Trust.
Having the Family Trust as the beneficiary and payer of life insurance policies also offers this unique advantage: All premiums plus 6% compounded interest thereon can be deducted from the policy payouts when it comes to estate duty. So, estate duty will only apply to the difference between the life insurance paying out and all premiums paid over the lifetime of that person plus 6% interest compounded.
Also remember, you can’t move big amounts of money from an individual to a trust without tax implications, so that’s another reason you want the life insurance policy to pay out to the Family Trust.
Taking all of this into account, our conclusion remains that individuals should have no assets and minimum debt in their names. This will ensure that you can take full advantage of the asset protection, estate planning, financing capability, and tax benefits. In essence, it’s not just a financial choice; it’s laying the groundwork for a future where your wealth stands resilient, your estate thrives, and your financial journey becomes an enduring legacy.
Read the entire article in the September Edition of Real Estate Investor Magazine.