Combining Life Insurance With Trusts to Provide Greater Family Financial Protection Term Paper

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Combining Life Insure With Trusts to Provide Better Family Financial Security

Summery: Life Insurance and Trusts are two financial arrangements which provide security to the family and living relatives of the owner of property or trust. In this article, we look at insurance, trusts and how these can be used for better financial security and risk management. The article contains six references.

Financial risk management is an important concept in the field of management. A person with an established business, occupation or source of income can suddenly take ill, resulting in the loss of that income which depended on him to generate. This can be a serious loss for him and others who depend on the income.

There are two financial instruments which are available which can continue to provide to him or his dependents financial compensation or income based on his previous investments. For monetary investments which had been paid on regular intervals, there is the instrument of life insurance. For property owned, there is the instrument of trusteeship. [Trusts & trustees 2003].

Thus both the established financial fund and the property can be managed in the event of the illness or death of the owner. Liquidity is required at the time of death to cover for final payments and other expenses. In this article, different aspects of trusts as well as life insurance and their combinations are reviewed.

What is a trust?

A trust is established when assets are transferred from one person to another with the instructions that the assets are to benefit a third party. The trust has had its concepts in the English Common Law and other countries have had their own concepts of trust enshrined in their legal systems.

A trust is the most flexible form of financial instrument and when an individual has placed an asset or property into trust then they should cease to have any further interest in the assets. The benefit passes on to the beneficiaries or is held on their behalf.

Thus to ensure that ones liquid savings have been well invested, the individual usually looks at the insurance instrument with considerable tax break and high growth and for the property one can consider trust since if the property was to be liquidated then there could be taxes, diminished property value and other considerations to think about which may yield lower returns. [Trusts & trustees 2003].

Elements of trusts

There are many different kinds of trusts [Trusts & trustees 2003].

Trustor trustor is a person who sets up the trust and places the original property for the trust. In family situations, this is the person who may be ill, dead or away.

Trustee trustee is the financial institution or institution on who trust can be placed. There are lots of trust companies and trustees hold property in trust for the beneficiary after taking possession of them from the trustor. The word fiduciary can be used to describe the duties of a trustee to a beneficiary. The trustee charges administrative costs from the income or proceeds generated by the property and the rest goes to the beneficiary.


Corpus is Latin for the body of a natural person. This is the trustor after Beneficiaries

The beneficiaries of a trust are those individuals who are to benefit or receive the income or rewards from the management of a trust property by the trustee. Which had been created for the benefit of the beneficiary by the trustor? The beneficiary may also be called the donee.

Written trust document

The written trust document is that agreement which is made between the trustee and the trustor or settler. The trust document will contain clauses which are required by the government regulation as well as any other terms and conditions agreed to by the two parties.

Determining a trustee

There are many considerations that enter into the determination of a trustee such as what is it that is expected from a trustee, what kind of trust administration is required and where the property is located. The person setting up the trust should examine their motives for setting up the trust. Examination of the different alternatives available should be conducted and all aspects such as management fees, taxation, terms and conditions etc. should all be looked at. Once the trust is made, there is a loss of control over the property. Many trust companies offer banks and other financial institutions attached with the firm [Trusts & trustees 2003].

Types of trusts (taxation issues of each)

There are many different ways in which trust agreements can be made and hence many different types of trusts. Broadly speaking, however, there are three main types of trusts which are listed below.

Simple trust. In this the income generated less the management fee is passed on to the beneficiary and there is no accumulation of wealth.

Complex trust is allowed to accumulate capital and has a charity beneficiary or distributes principal.

Grantor trust. In this trust arrangement, a grantor retains sufficient power in the trust or has sufficient control over the trust that for income tax purposes, the grantor is considered to be the owner of the property.

The taxation to be levied on each of the above forms of trust is determined by the income generated, any expenditures, the management fees, any maintenance of the property as well as with due regard to the ownership of the trust. If the trust's beneficiaries are charities then the taxation rate will be different from the case otherwise. [Trusts & trustees 2003].

Inter-vivo trusts

These are the kind of trusts which can be established during one's lifetime and the property may be passed on to the trustee at a time mutually agreed to be fore the death of the trustor. The inter-vivo trusts can either be revocable or irrevocable. Revocable trusts can be revoked if the trustor is alive and irrevocable trusts cannot be revoked once executed.

Testamentary trusts

Testamentary trusts are trusts that take effect on the death of the trustor. A person may want to make a donation to a charity but his circumstances may not permit this. He can make arrangements to have the rest of his property to be used for making a contribution in the form of a trust in benefit to the charity after his death. [Trust and trustees 2003].


An irrevocable testamentary trust cannot be revoked after the death of the person who established this trust on his death by the instrument of his will. There may be limited exceptions to this rule which can be decided by a court of law.

Charitable trusts charitable testamentary trust is a trust in which the beneficiary is a charity i.e. A body for the advancement of the Arts, Education, Humanity etc. The charitable trust may be either revocable or irrevocable and the taxation from this as well as the management fees will be different from other types of trusts.

Remainder trusts

In a reminder trust, the property that is being used for the trust may provide a fixed return to the trustor during his lifetime or a fixed income to the beneficiary for a specified time or lifetime of the beneficiary. On the death of the trustor or the beneficiary, the reminder of the trust may be used in a variety of ways including making a charitable contribution to a charity. The reminder, instead of being given to a charity, may also be given to a third individual or organization.

Lead trusts lead trust means that the property passed on to the trustee is managed by the trustee and a percentage of the returns are paid to one beneficiary for a certain number of years. After the completion of the specified number of years, the reminder of the property is either handed over to the heirs or other beneficiary specified in the will.

A charitable lead trust will, therefore, pay a certain percentage of the income generated as a result of the management of a property for a certain number of years with the reminder being handed over to the heirs.

3. Unit trusts

Unit trusts invest in a wide variety of shares so that one does not have to and they are an excellent investment choice for the new and experienced investor. When an investor buys a unit, it means that he subscribe to a portion of the issued share. The investment manager then tries to use that investment in various investment units that offer the highest value according to the value of the total fund. The running cost for investment, buying and dispersing shares are charged to the investor aside from the initial fee as a deposit for the purchase of the shares before it materialize for the investor. The fee is basically a percentage of the share of investment in the total investment fund. Thus one can invest in a unit fund and earn significant profits without minimal price, limited to the portion/unit the investor puts into the Unit trust. In the U.S.…

Sources Used in Document:


Trust and trustees. 2003. Introduction to trusts. Referenced: November 19, 2003. Web site:

William G. Kistner, Healthcare and Financial Management. July 1998. Life insurance trusts can save estate taxes. Referenced: November 19, 2003. Web site:

1040 Types of trusts. 2003. Referenced: November 19, 2003. Web site:

College for financial planning (CFFP). 2003. Life Insurance Trusts: A way to save taxes and exert control. 2003. Referenced: November 20, 2003. Web site:

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