Fixed assets but limited cash? Why a Life Insurance Trust may be good for you

For those with fixed assets but limited cash, Life Insurance Trusts may be a better, more flexible, and lower cost, option

As the global pandemic starts to recede, many are turning their minds to protecting their loved ones. Among the many solutions out there, Life Insurance is usually a natural starting point as a means to ensure close family members remain safe and secure. However, for those who have significant immovable assets – such as property or a company – yet limited liquid assets, a Life Insurance Trust may be a better option.

A Life Insurance Trust is essentially a Trust that owns the Life Insurance policy that the Settlor takes out and collects and disburses the proceeds when the insured passes on. All proceeds are disbursed per the wishes of the insured, according to the terms of the Trust document.

Life Insurance Trusts provide a number of benefits, as it is a way of investing to provide liquidity and protection to both Settlor and Beneficiary, such as paying medical expenses or any future tax payable. Additionally, once the insurance is paid-out on the death of the insured, the Beneficiary will have sufficient funds to meet any tax payable, funeral expenses within a short period of time and prevent the sale of assets such as properties, which the family wishes retained.

A number of additional benefits are listed below:

  • Confidentiality

As the policy will be in the name of the Trust, the Trust would not appear on any public registers and so both Settlor and Beneficiary(ies) would remain anonymous.

  • Succession Planning

A letter of wishes can be drawn up to express the Settlor’s desire to release funds to certain beneficiaries over a sustained period rather than an immediate pay-out of the sum assured. This provides peace of mind to the Settlor that the funds will be a in accordance with their wishes. This is especially important if they have children under the age of 18 and wish to help cover expenses and plan for their education. Additionally, a trustee can be named as the beneficiary, who can then disburse the payments in accordance with the rules set for the Trust.

  • Estate Planning and Consolidations of assets

If the policy is placed in a Trust, the proceeds will not form part of the deceased’s estate and therefore help to mitigate any estate taxes. We often see products such as Private Placement Life Insurance (PPLI) being utilised as a useful tool, and these can be owned by Trusts.

  • Cost efficiency

Although Trusts are often viewed as an expensive option for many, they can be reasonably cost effective when the underlying asset is limited to an insurance policy. The main driver for this is that there is little administrative work involved on an ongoing basis. The cost can be reduced even further still if the client prefers to setup a Standby Trust which is when the Trust is only named as the policy beneficiary rather than both the owner and the beneficiary.

  • Flexibility

The Settlor can further use the Trust to settle additional asset classes at any given time and the Trustees can be asked to consider the addition and removal of beneficiaries during the lifetime of the Trust. Once the Trust moves away from purely holding an insurance policy, the costs will be adjusted accordingly. The flexibility is the main attraction here.

Alpadis Group work with a number of leading Brokers and Insurance carriers both in Hong Kong and internationally and can also assist with cases where there may be a premium financing requirement.

For more information, contact Alpadis Group.