380 likes | 478 Views
The Intersection of Separation Agreements and Life Insurance. Robin Goodman, B.A., LL.B, TEP AVP Tax & Estate Planning. Important Information. This presentation is intended for professional education. Do not reproduce or distribute this presentation without the permission of Manulife
E N D
The Intersection of Separation Agreements and Life Insurance Robin Goodman, B.A., LL.B, TEP AVP Tax & Estate Planning
Important Information This presentation is intended for professional education. Do not reproduce or distribute this presentation without the permission of Manulife Financial.
Separation Agreements and Life Insurance • Most agreements require insurance for a period of time • Proceeds can be used to • Replace support • Provide separate obligation to create or maintain wealth • Buy-out interest in corporation or trust • Must ask series of questions to ensure structure best suited to both parties
What to Consider? • What’s the purpose of the insurance • How much insurance do we need • For how long? • Who should own the policy • Who should be the beneficiary of policy • How do we ensure that the premiums are paid up • Should we use an irrevocable beneficiary designation • Pros and cons • Should we use an Insurance trust • Can we? • Should we use irrevocable beneficiary designation • Will the policy be creditor protected • How do we deal with corporate ownership of insurance • Do we need new insurance or use existing insurance • How do we change beneficiary back after obligation ceases
General rules of Insurance Act (Ontario) • Owner rights • Make or change beneficiary • Transfer or assign policy • Withdraw funds • Change coverage amount • Pay premium or not pay premium • Limitation on owner rights • Irrevocable beneficiary designation • Incapacity • Power of attorney • Assignment • Joint ownership
Many Ways to Structure….What’s the Purpose of the insurance??? • Guarantee support or • Independent obligation or • Guarantee of estate distribution or • Guarantee of purchase of interest in corporation
Court’s Right to interpret Purpose Turner v. DiDonato et al. 2009, 95 O.R. (3d) 147 (On.C.A.) • Separation agreement required support payable till age 65 • Agreement required $100,000 life insurance policy maintained till age 65 • Support payor died 9 years before support obligation terminated • Ex-wife argued entitlement to full $100,000 • New wife argued entitlement to $43,000 only • Argued that his “intention” was likely not to create windfall • Court: • Was life insurance policy required by separation agreement security for diminishing support or was it an independent obligation? • Ont. C.A. - if the parties intended insurance policy to merely be security for support payments and nothing more should have addressed it in agreement • Insurance policy was separate obligation and not security for support • Full $100,000 payable • No argument of mistake
Purpose prevents another designation Schorlemer Estate v. Schorlemer(2006) Canlii 42364 (Ont S.C.) • Father had obligation in separation agreement to maintain insurance for daughter’s benefit while child of marriage • Weeks before death, dad changed beneficiary to second wife • Daughter was 22 and in last year of university • Second wife claimed she was dependent • Court confirmed that obligation under agreement prevents another designation • Imposed a trust over death benefit • Court has discretion to alter terms of agreement to ensure adequate support of all dependents • Court imposed trust over full amount of proceeds • Found no windfall to daughter - remedy specified in contract • No mention of diminishing obligation • Found wife adequately provided for elsewhere
Or… Purpose permits another designation Roberge v. Roberge, 2007 SKQB 310 • Separation Agreement required 4 children irrevocably designated as beneficiaries • 2 children already adults at time of agreement • Argued material change in circumstances • All children now adults • Father remarried • Can court vary terms of agreement to effectively “undesignate”? • Must look to intentions of parties at time of agreement • Intention to provide maintenance v. distribution of husband’s estate • Court found that intention was to provide maintenance • Under heading of Child Support • Allowed court to undesignate without consent of irrevocable beneficiary
Practical drafting suggestions • Clear indication of purpose of insurance • Timeframe for maintaining insurance • Ability to reduce benefits payable as support NPV reduces • Insurance may be valuable (existing or new) • Reduce coverage • Reduce amount payable • Mechanism to obtain consent if irrevocable beneficiary • Executed consent in escrow – acceptable to insurer? • Staledated • Merged companies • Alternative to irrevocable designation is third party trustee holding policy • Trust terms reduce payment of proceeds over time or return policy
Practical drafting suggestions • File agreement with insurer • Instrument that can contain Declaration • Avoids neglect to change beneficiary on payor’s part • Avoids need to change beneficiary annually to reduce payment • Indicates intention
Ownership of policy • Personal is customary • PROS: • Easiest to secure and underwrite • Simple method of paying premiums • CONS: • Rights of ownership leaves recipient spouse vulnerable • Alternatives?
Ownership of policy • Joint Ownership • PROS: • Protects recipient spouse • Signature required for beneficiary changes • Signature required for assignment or transfer • Right to information • Put provision in agreement allowing recipient to make payments if necessary • CONS: • Personal info of payor spouse available to recipient • How to guarantee transfer of policy after obligation terminates • Transfer of ownership form in escrow – acceptable to insurer? • Potential tax consequences to recipient spouse on transfer • Incapacity of one owner • May not permit designation of testamentary insurance trust • Not created by THE person who’s death gave rise to the trust
Ownership of policy • Third party (trustee) owner • PROS: • Payor continues responsibility for premium payment • Trustee has notice of potential lapse and can advise recipient • Put provision in agreement allowing trustee to make payments if necessary • Trust terms avoid change of beneficiary or assignment of policy • Incapacity not an issue • Beneficiaries = recipient (proceeds) • Beneficiary = payor (insurance) • S. 107(2) rollout • CONS: • Finding that third party • Proceeds payable to trust (not testamentary)
Ownership of policy vs. irrevocable beneficiary • Alternative to complex ownership structure • Irrevocable beneficiary = removal of policy from hands of owner • Not subject to creditors • Can’t change beneficiary designation without consent • Can’t transfer or assign • Entitled to information re: lapse from insurer • Must be filed with insurer to be effective • Reasonable solution for spousal support obligation
Ownership of policy vs. irrevocable beneficiary • Need mechanism to obtain consent to change beneficiary • After cessation of obligation • If reducing obligation • Pre-signed consent form? • Acceptable to insurer • Question of later incapacity • Put consent in Separation Agreement • File with insurer • Additional evidence of intention
Insurance for benefit of children – INSURANCE TRUST • Trust created to hold life insurance proceeds • Created outside Will • Retains testamentary status • Need 3 Certainties • Flexible trust terms • Created as a result of beneficiary designation
Insurance for benefit of children – INSURANCE TRUST • Child can’t give receipt to insurer • Permits control over proceeds • Terms can require proceeds held till children attain stipulated age • Proper trust terms rather than bare trust • Ensure distribution date • Ensure gift over (avoid Saunders v. Vautier) • Generates testamentary tax treatment over proceeds • Single life policy/personal owner • Joint ownership treatment is questionable • Trust ownership treatment = inter vivos trust • No one else can contribute to trust • DOES NOT extend creditor protection over proceeds
Insurance for benefit of children – INSURANCE TRUST • If need single life/personally held policy • Control over beneficiary designation? • Irrevocably designate trustee • How do we do this if trust doesn’t yet exist? • Is right to consent “property” • Have we created inter vivos trust instead • If testamentary trust • How does trustee consent to change of beneficiary • Now or in future • Trust doesn’t exist
Insurance for benefit of children – INSURANCE TRUST • Accept that not testamentary trust • Obtain pre-signed consent form from trustee • What if trustee not same person at time of cessation of obligation • Draft so that children are beneficiaries • Appoint trustee on their behalf • Subtle difference, but… • may retain testamentary trust treatment • May give extra creditor protection • Remaining problem – obtaining consent to cessation of obligation
Insurance for benefit of children – INSURANCE TRUST • Where is trust declaration contained? • In Will • Can’t make irrevocable designation in will • In Separation Agreement • Signed by both parties • Testamentary trust? • On Contract • Append trust terms when filing
Other issues to discuss • 3 types of life insurance • Term (Temporary) • Perm (Permanent) • Group
Term Insurance • For temporary insurance needs • Relatively inexpensive in early years, cost increases as insured ages • Coverage expires at certain age (typically 75) • Appropriate where need is for a specific period and cash value not required
Permanent Insurance • Coverage for life • Level cost or quick pay • Tax advantaged
Type of Insurance Term vs Perm = If vs When • Short term need - Term Insurance • e.g. child support • Long term need – Permanent Insurance • Other estate planning needs • May start out as one and end up as another
Interaction of marriage contract, Will and beneficiary designation • Elton Estate v. Elton, 2010 NLCA (CanLII) • Marriage contract limited amount of insurance payable to wife to specified amount ($450,000) • Subsequent Will provided for insurance proceeds naming wife as beneficiary and any addition insurance monies necessary to provide her with $450,000 • Court found this to be the beneficiary designation that governed • Is it clear? • Does it limit amount to $450,000 or does it mean she gets all proceeds she is designated to receive under policies?
Changing Beneficiary Designations…after death • Richardson v Mew(2008), 300 D.L.R. (4th) 503, 93 O.R. (3d) 537 (S.C.J.), affd 2009 ONCA 403 • Touched on Issues of: • When can a Constructive Trust can be imposed over life insurance proceeds • When could a rectification argument succeed • The effect of a general release clause in a separation agreement • The Beneficiary Designation as a testamentary disposition • Impact on the ability to use powers of attorneys
Richardson v. Mew (2008), 300 D.L.R. (4th) 503, 93 O.R. (3d) 537 (S.C.J.), affd 2009 ONCA 403 • Michael was married to Stephanie (1965-1992) • Michael was then married to Anne (1992-2007) • Michael became incapacitated and Anne took over his finances • Paid for out of joint account and once depleted, out of her funds • Michael died (2007) holding $100,000 life insurance • AND THE BENEFICIARY WAS • Supposed to be Stephanie until 2005 (court ordered) • Anne thought it was only a “temporary” designation • Michael never changed the designation
Richardson v. Mew (2008), 300 D.L.R. (4th) 503, 93 O.R. (3d) 537 (S.C.J.), affd 2009 ONCA 403 • Stephanie’s Argument: • Money should be paid to her outright • Insurance Act: moneys payable to Beneficiary • Stephanie was named in contract • Designation is unassailable • Anne’s argument: • Money should be held on constructive trust for her because: • Michael inadvertently forgot to change the designation • Windfall to Stephanie • Stephanie was unjustly enriched by receiving proceeds • Anne was correspondingly deprived by paying premiums • General release clause in separation agreement should have had effect of “undesignating” • Had she known she would have used power of attorney to amend designation
Richardson v. Mew (2008), 300 D.L.R. (4th) 503, 93 O.R. (3d) 537 (S.C.J.), affd 2009 ONCA 403 • The Court found: • BENEFICIARY DESIGNATION IS AKIN TO A TESTAMENTARY DISPOSITION • Power of attorney? • Good discussion of elevation of duties where diminished capacity • Testamentary disposition? • No evidence that Michael intended to change beneficiary designation = NO RECTIFICATION • Rectification requires evidence of significant mistake • His inaction is the best evidence of his intention • Proper beneficiary designation with no mistake = juristic reason to receive proceeds • ie. Stephanie’s entitlement is supported by law • Juristic reason = NO CONSTRUCTIVE TRUST ARGUMENT • SEPARATION AGREEMENT: general release clause is different than life insurance designation clause • General language used in waivers and releases is NOT A DECLARATION within the meaning of the Insurance Act.
Richardson v. Mew (2008), 300 D.L.R. (4th) 503, 93 O.R. (3d) 537 (S.C.J.), affd 2009 ONCA 403 • Drafting ideas? • Execute change of beneficiary form at time of Separation Agreement • Hold in escrow • Change beneficiary to estate • Probate • Can change again • Distributed through terms of Will (intestacy) • Third party trustee holds policy • No concerns of incapacity • Control over policy while obligation exists
Corporate Context • Life insurance in corporation • Maintained to redeem shares from spouse or trust at death Ribeiro (Estate) v. Braun Nursery Ltd. 2009 CanLII 1149 (OSC) • Redemption of deceased’s shares pursuant to shareholders agreement • Life insurance for key person protection used for redemption • CDA retained by corporation • Shareholders agreement did not address use of CDA • Estate not entitled to capital dividend
Corporate Context - Life Insurance Shares • Ms A owner/manager of private corporation (Opco) held through Holdco • Adult children not involved in Opco • Wants Holdco to fund an insurance policy on Ms A’s life • Ms A wants to take advantage of spousal rollover (testamentary spouse trust) • Wants insurance proceeds to go to kids
Life Insurance Shares • Shares designed to give holder right to insurance proceeds • No other corporate value • Way to stream insurance proceeds to (non-shareholding) heirs • Valuation issues addressed by CRA
Life Insurance Shares: 2005 – APFF CRA Roundtable • ATTRIBUTES • Shares have nominal value during lifetime • Share terms defer payment (if redeemed during lifetime) till after death • Can’t force collapse of insurance policy • After death, redemption = insurance proceeds • 2 SCENARIOS (at death) • common shares reflect CSV, insurance shares have nominal value • insurance shares reflect CSV, common shares not increased
Planning for Ms. A Ms. A Mr A Adult Children 100 % common shares Life insuranceshares Holdco • On death of Ms A, the entire corporate value is attributable to the common shares (including the cash surrender value). • The common shares are rolled to Mr. A • The life insurance shares are gifted to adult children and insurance proceeds distributed tax-free to children through CDA.
6. Trust As Owner of Insurance • Keeps policy out of corporation(s) • No disposition at death of individual owner • Good alternative where intention is to benefit a non-shareholder • Eg. Inter-generational transfer alternative • Control over distribution of proceeds • Can roll policy out to capital beneficiaries • CRA says: Although life insurance is not capital property for tax purposes, it is trust capital for trust law purposes. • 107(2) applies rather than 148(7) • Not subject to 21 year rule because not capital property • No rollover into trust • Need to fund premiums Trust