- Nader Ansary, VP of Advanced Markets
Written by Glenn Stephens, LL.B, TEP, FEA, Independent Consultant
ACES Blog Article for May 23, 2025
Introduction
There are many circumstances where parents want to provide life insurance protection for their young children. Benefits are typically payable on the death of one or both parents. In these cases, it is important to ensure that appropriate trust provisions are utilized to protect the interests of the children.
There are also many situations where an adult child is named as beneficiary. This person may be old enough to manage the proceeds without a trust being required, but there are occasions where a seemingly straightforward designation could potentially be problematic.
This post will consider some common mistakes and planning tips relating to both of these types of designations.
Life Insurance Testamentary Trusts for Minor Children
Where minor children are to benefit from life insurance proceeds, the use of a testamentary life insurance trust (“LITT”) is recommended. A LITT is a testamentary trust because it only comes into existence when proceeds are paid on the insured’s death. Like any trust, the proceeds are received by the trustee(s) and dealt with in accordance with the trust provisions, which in this case are stipulated by the policy owner by way of a beneficiary designation. A LITT can be created in one of three ways, as described below.
(i) Insurance Company Form
A LITT can be created using the insurance company form by stating, for example, that the proceeds will be paid “to my sister Sarita in trust for my children Josh and Hanna”. If the insured dies and the proceeds are paid to Sarita, a trust is created and Sarita is obliged to deal with the proceeds on behalf of the children.
This very simple trust is however deficient in many respects. For example, if the children are minors the trust fund can only be held for them until each of them reaches the age of majority, at which point they are entitled to receive their money with “no strings attached”. Most parents would not want their children to acquire significant amounts of money at such a young age. In addition, it gives the trustee no discretion regarding the investment of the proceeds or the distribution of income and capital for the benefit of Josh and Hanna while they are still “under age”.
Therefore, while a LITT can be created using the insurance company form, it is not the recommended approach.
(ii) Will
A beneficiary designation can be made in the individual’s will. With careful wording, the insurance proceeds will not fall into the deceased’s estate and will not be subject to probate or claims of the deceased’s creditors. This allows for much more extensive and creative trust provisions that can, for example, provide wide discretion to the trustee regarding when income and capital may be distributed to beneficiaries. It can also delay final distribution until an age, such as 25 or 30, that is considered appropriate by the insured.
Despite these advantages, there are some concerns with using a will to create a LITT:
- This method makes it more likely that a designation could be affected by litigation involving the will, even if the proceeds themselves are not part of the estate.
- If the individual wishes to change the beneficiary designation, the process of changing the will may be more cumbersome than changing other kinds of designations.
- If the will is probated, the terms of the LITT and the other will provisions become public, whereas most beneficiary designations do not need to be public.
- An irrevocable designation cannot be made in a will.
(iii) Separate Document
A designation containing full trust provisions can be written in a separate declaration that is not part of the will. This permits the same advantages that are available to a will designation, but without the will-related problems referred to immediately above. In many cases, this is the most recommended method for creating a LITT.
Whether it appears in a will or a standalone document, a properly drafted LITT will require the use of a lawyer. This may be seen as a costly roadblock, especially to clients of modest means. Having said that, reasonable costs are justified when the objective is the protection of children. If the clients are already updating their wills as part of the process, the additional incremental costs should not be significant.
Designating an Adult Child as Beneficiary
A number of court cases across Canada have dealt with the doctrine of “resulting trust” as it applies to beneficiary designations. These cases have largely focused on registered plans, such as RRIFs, where one of the deceased’s adult children was named beneficiary to the exclusion of his or her sibling(s).
In the 2020 Ontario case of Calmusky, for example, the Court found that the named beneficiary (son of the deceased) held the proceeds of the deceased’s RRIF on a resulting trust for the estate, which meant that the other estate beneficiary (his brother) was entitled to share in the proceeds. In this case, it was the judge’s opinion that the named beneficiary had the onus of proving that the deceased intended to benefit him alone, and that he had failed to do so. However, a different judge of the same Court subsequently came to the opposite conclusion in the Mak Estate case. His view was that the resulting trust principle did not apply to beneficiary designations. Case law in the provinces has not been consistent and this area of the law is currently unsettled.
There are strong arguments that beneficiary designations under registered plans or insurance policies should not be subject to resulting trusts. These designations are creatures of statute, such as the Ontario Succession Law Reform Act and the Insurance Act of each province, and in all cases this legislation allows an individual to designate their estate as beneficiary if that is their wish.
Given the variations in judicial decisions and the potential for disputes among beneficiaries, however, it is still good practice for insurance and financial advisors to clearly document client intentions whenever beneficiary designations are made on registered plans or insurance policies. This is true in any case, but particularly so where an adult child is designated and there are other adult children who are not.