Trust Ownership of Insurance
Trust Ownership means that a Trustee is the legal owner of the policy on behalf of the Life Insured. As the Life Insured will still be the “beneficial owner” of the policy, Death Benefits paid under a trust owned policy will still be exempt from CGT where the Trustee is bound to pay the Death Benefit to or at the direction of the Life Insured. Similarly, where the Trustee receives a Non-Death Benefit on behalf of the Life Insured in circumstances where it is bound to pay that benefit to or at the direction of the Life Insured, Trust Ownership will preserve the CGT exemption for that Non-Death Benefit.
To achieve these exemptions, and the broader intentions of the business succession planning arrangements, the Trustee and all relevant parties must enter into an agreement (“Trust Owned Insurance Agreement“) setting out, among other things:
- the parties’ respective obligations in relation to the maintenance of policies on behalf of the Life Insureds (the ‘beneficial owners’),
- those beneficial owners pre-determined directions to the Trustee in connection with the payment of the insurance proceeds.
These pre-agreed directions ensure that the true Related Entity Owners receive the sale proceeds for their equity in the business and that any intended part be paid to reduce debt of the business. As such a Trust Owned Insurance Agreement can facilitate the maintenance of a single policy in respect of a Life Insured covering amounts required to:
- Perform the continuing owners’ obligations under a Buy/Sell Option Agreement, namely to pay the market value or purchase price for the outgoing owner’s equity;
- Reduce business debt proportionate to the outgoing owner’s equity in the business to ensure the release of any personal guarantees of the corresponding Life Insured and their Estate; and
- Cover the personal insurance needs relevant to the individual Life Insured, for example for the purpose of paying out a mortgage over the Life Insured’s home.
Trust Ownership is, therefore, recommended whenever the real owners of the equity in the business is a related entity of a Life Insured (such as a Company or Family Trust).