An insurance trust is a good mechanism for controlling the use and timing of life insurance proceeds following the death of the insured, Toronto wills and estates lawyer Lisa Laredo tells AdvocateDaily.com.

Establishing an insurance trust in your will directs life insurance proceeds to be paid to a trustee who then receives and administers the funds to a beneficiary, particularly if they are under the age of majority.

“Policy proceeds can’t be paid to a minor because they can’t give a release. Without a trustee to receive and administer the funds — at least until the beneficiary reaches the age of majority — the funds must be paid into the court or to the public guardian and trustee,” says Laredo, principal of Laredo Law.

Like all trusts, there must be certainty of words — the wording of the document must clearly establish a trust relationship, she says.

“The proceeds of the specific life insurance policy and the beneficiaries must be spelled out in the trust agreement along with the proposed uses of the trust fund,” she says,

Laredo says they can be set up several ways. One is through the use of a separate trust agreement delivered to the insurance company.

Another is to include insurance trust clauses within a will, provided they are stated to be a declaration within the meaning of the Insurance Act and refer to a specific policy(s), and a copy of the will is delivered to the insurance company.

“Insurance declarations by will are specifically provided for in the Succession Law Reform Act,” she says.

A third way is to include a specific reference to a trust in the initial application for insurance along with reference to a will where the terms are set out.

“The will can’t be dated prior to the application,” Laredo says. “The application containing a designation revokes all prior ones.”

She notes that when the same person is acting as both estate trustee and the insurance trustee, they must be specifically appointed by distinct provisions in the will to the separate capacities, and failing to spell that out, the proceeds of the insurance policy may flow through the estate.

Other reasons to consider an insurance trust include situations where a settlor wishes to control the timing and use of the funds past the age when the beneficiary reaches majority.

“Sometimes an insurance trust is set up to prevent the depletion of the proceeds by an immature or spendthrift beneficiary,” Laredo notes. “Or the trust can provide for the orderly distribution of the proceeds to a disabled beneficiary, ensuring they are still eligible to receive government benefits.”

Laredo says insurance trusts also provide protection from creditors.

“While the insured is alive, some policies have a cash value,” she says. “Where a child of the insured — and some other categories of relatives — is a named beneficiary, the value of the policy is protected from creditors of the insured.”

Whether a trustee for a minor child qualifies as a child for this protection is unclear, Laredo says.

“Upon the death of the insured, where there is a designated beneficiary, the insurance monies are deemed not to be part of the estate and are free of the claims of his creditors.”