Remember the Hair Club for Men ads (“Not only am I president …I’m also a member.”)? This article is kind of like that.
You see, when second son, Atley, was born, my wife and I realized that in the event of (either/both) our deaths, the cost of raising our family in the manner we wanted would be financial impossible. If Atley wasn’t already keeping us up at night, that concern would have. So, we increased our insurance, updated our wills and, if Atley had let us, we would have slept better.
Most young families have young assets: a house with little equity, new or recent hire incomes and starter savings/investments. There may be significant debts (e.g., school loans). Regardless, it’s unlikely to save enough to address the needs of young children raised to adulthood without ongoing income. A well drafted will alone isn’t going to address shortfalls in your estate plan. Life insurance, if available, is a good option.
Proceeds paid to a named beneficiary are not part of the estate. They belong directly to the beneficiary. This has some great advantages: proceeds tend to be available more quickly, are not subject to claims by creditors of the deceased/estate and won’t increase probate fees.
Parents may designate each other as beneficiaries and then an alternative. The surviving parent has proceeds available for his or her own support and for surviving children. Rather than the children themselves, the alternative beneficiary is usually a trustee who holds proceeds in trust for the children.
While insurance contracts allow you to designate trustees, they don’t provide particulars about how the trustee manages the proceeds including when and how proceeds may be paid to a child or for a child’s benefit. Further, parents may want proceeds managed beyond the age of majority to avoid an eighteen year old having absolute control over significant sums.
Therefore, it is useful to set up an insurance trust with respect to proceeds, either within a will or through a separate declaration. An insurance trust must be carefully drafted to allow flexibility to address the child’s needs and to avoid the proceeds becoming part of the estate. The document should be reviewed and approved by the insurer as well.
For young families life insurance may be an estate planning cornerstone. The death of a young parent is heartbreaking. The financial impact it creates for the surviving spouse and children is something that can be mitigated while you’re alive with advise from your lawyer and your insurance advisors.
Adam Kowalsky is an associate at the law firm of Cobb & Jones LLP. For more articles, visit the library page at www.cobbjones.ca