Although wills are one of the few important estate planning tools, it alone may not be sufficient in addressing your needs or in protecting your assets and wealth. As such, the use of trusts is sometimes considered by individuals, in addition to having a will. A good understanding of the various estate planning tools that are available can help to avoid family conflicts, loss of assets or unexpected costs and taxes.
Whereas in property trusts an owner (“the Settlor”) entrusts another party (“the Trustee”) to look after his/her real estate for the benefit of the beneficiaries, life insurance trusts are designed with the ownership of an insurance policy or policies. These are generally passive structures and its benefits to be given to beneficiaries upon payout as its principal or only function. A life insurance trust generally involves the assignment of a life insurance policy, into a trust for purposes of estate planning, asset protection and succession planning.
In this article, Mr. Lee Chiwi, the Chief Executive Officer of Rockwills International Pte Ltd — who was called to the Bar of England & Wales as a Barrister-at-Law in 1986 and admitted as an Advocate & Solicitor of Singapore in 1988 — provides a synopsis of insurance trusts in Singapore, as well as some of the advantages and disadvantages that come with the setting up of such a trust. With extensive experience in the industry, Mr. Lee has written several books on wealth management. He was designated ChT (Chartered Trustee) by the Singapore Trustees Association in 2015, a title borne only by senior trust practitioners in Singapore.
So, what are the features and benefits of an insurance trust?
First of all, it should be noted that the same property trust can also hold insurance policies.
Most people may be cash poor but asset rich; in particular, when someone has policies with payouts upon death, an insurance trust holding such policies can provide a very good resource for the family or beneficiaries a Settlor has chosen.
As insurance trusts are passive with little or no active management required by the Trustee(s), (when the triggering event of payout has not occurred) the trustees could generally adopt very low annual charges while there is no payout of the insurance policy.
A useful structure to hold insurance policies is the standby trust, in which there will be no activity till death occurs when a Trustee collects the proceeds. It can even include the CPF nomination monies, when a Settlor nominates the Trustee to be the recipient. Upon death, real estate, insurance and CPF proceeds can come into the trust and the monies distributed to last for a couple more years for the benefit of the beneficiary(ies).
To enable a Trustee to upkeep the policy, the Trustee should be authorised to use income and capital from other assets or cash held in the trust to pay for premiums. However, there is no impediment should the Settlor pay for the premiums.
In summary, insurance trusts help to provide liquid funds to meet liabilities of the deceased’s estate that would otherwise have to come from selling his/her assets when it may not be timely or where the assets are mainly illiquid.
Besides that, such trusts also make available a sum of money upon maturity, the occurrence of death or other events such as critical illness that might not otherwise be available. Under certain conditions, the trust and its underlying asset can be protected against creditor claims as well.
What is the difference between a will and an insurance trust?
A will generally states what you want to give from your estate to your beneficiaries. When you put in a trust provision, the sum of money held in trust can be given out in small doses over the period of a few years. This helps to avoid a young person receiving a huge sum of money too early e.g. before completing his/her studies or when the person is considered financially incompetent in managing large amounts of money.
Basically, the terms of the trust can spell out the time when the beneficiary(ies) receive the proceeds. Putting in place a structure whereby the ownership of a policy is held by the Trustee, the proceeds — received upon death — will be used according to the instructions stipulated in the trust instrument.
What are the types of insurance policies which can be held by an insurance trust?
They could be long-term such as life insurance policies. As for those investment-linked policies that require attention of Trustees, they are usually not something that a Trustee would want to engage in. If they do, there might be fees and would take up much of their time.
On the other hand, it would be fine to hold a universal life insurance because it is usually a one-time payment and passive in nature. Same goes for endowments, which are policies that will be held for 15-20 years with payout at the end.
What are the costs involved in setting up and maintaining an insurance trust?
Generally, the advice of some trustees is to set up a standby trust, which will cost about S$4,000. Usually, it is not just confined to holding insurance policies but to be the vehicle for the CPF nomination and money coming from the estate when death occurs.
Of course, some clients may have a specific purpose and decide to hold only insurance policies under the trust e.g. the Trustee to collectthe proceeds and donate them to charity upon the Settlor’s death.
In the same interview, Mr. Lee has also provided insights into property trusts in Singapore — check out this article to find out more.
Note: This article provides only a brief glimpse into the many aspects of an insurance trust, which may serve as a general guidance but is not meant to dispense with legal advice. You are advised to seek independent legal advice on any problems or questions that you may have. For more information, you may refer to the book “The Rockwills Guide to Succession and Trusts in Wealth Management” by Mr. Lee, from which part of this article is excerpted with permission.