Wednesday, December 08, 2004
Testamentary Life Insurance Trusts - a useful vehicle in the protection of support payments
Separation agreements often require a spouse, to pay spousal and/or child support. In the separation agreement there is often a paragraph which requires the payer spouse to have in place a set amount of insurance as security for payment of the duty to pay support, in the event that the payer spouse should die before his or her obligations to pay support are complete. In many cases, the separation agreement will require the insurance be payable to the payee spouse.
There are some problems which arise from this arrangement. From the point of view of the payer spouse, they might die just before their obligation to pay support is complete. If this were to happen and the insurance was paid out to the payee spouse, the payee spouse would have a windfall. This is something that the payer spouse is unlikely to want.
A suggestion to deal with this dilemna, is to make the insurance payable to a trustee of a testamentary insurance trust. The trust can be set up, naming a trustee and requiring the trustee to pay the support, pursuant to the separation agreement or court order, so long as required by law. The insurance funds will be paid to the trustee on the death of the life insured payer spouse. The trust can further state that once support payments are no longer required by law, that the balance of the funds held in trust should be paid out as detailed by the payer spouse in the trust deed. So, for instance, the balance of the fund could be paid at that time, to the deceased payor's children, or new partner or spouse.
Life insurance funds paid out to a trustee of a testamentary life insurance trust are not subject to Estate administration Tax (formerly called "Probate fees"). This is a savings to the estate of the deceased on death. In addition, since this is a testamentary trust, the trust will have the benefit of graduated tax rates - and will pay lower income tax than for instance an inter vivos trust.
There are other ways in which a testamentary insurance trust will be useful in your estate plan. I shall discuss these in future.
There are some problems which arise from this arrangement. From the point of view of the payer spouse, they might die just before their obligation to pay support is complete. If this were to happen and the insurance was paid out to the payee spouse, the payee spouse would have a windfall. This is something that the payer spouse is unlikely to want.
A suggestion to deal with this dilemna, is to make the insurance payable to a trustee of a testamentary insurance trust. The trust can be set up, naming a trustee and requiring the trustee to pay the support, pursuant to the separation agreement or court order, so long as required by law. The insurance funds will be paid to the trustee on the death of the life insured payer spouse. The trust can further state that once support payments are no longer required by law, that the balance of the funds held in trust should be paid out as detailed by the payer spouse in the trust deed. So, for instance, the balance of the fund could be paid at that time, to the deceased payor's children, or new partner or spouse.
Life insurance funds paid out to a trustee of a testamentary life insurance trust are not subject to Estate administration Tax (formerly called "Probate fees"). This is a savings to the estate of the deceased on death. In addition, since this is a testamentary trust, the trust will have the benefit of graduated tax rates - and will pay lower income tax than for instance an inter vivos trust.
There are other ways in which a testamentary insurance trust will be useful in your estate plan. I shall discuss these in future.
posted by Robert at 8:07 AM
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