Life insurance trusts deal with how insurance payouts are managed and distributed. There are several different types of life insurance trusts in Canada.
In some cases, if you name a minor as your life insurance beneficiary, a trustee may need to manage the money. Learn more using the Financial Consumer Agency of Canada’s life-insurance guide, Ontario’s Insurance Act, the CRA’s 2025 T3 Trust Guide, and Ontario’s Office of the Children’s Lawyer guidance.
Setting up a life insurance trust has important legal and tax implications. Talk to a professional to learn whether a life insurance trust makes sense for your situation.
What Is A Life Insurance Trust In Canada?
There is no single form of life insurance trust in Canada. It could be as simple as naming a trustee to receive policy proceeds for a beneficiary. It could be a testamentary trust created by your will, with a beneficiary designation directing the proceeds to the trustee. A trust may already be in place and could be the beneficiary or owner of the policy.
Many factors come into play in determining which type of trust would be appropriate, including the circumstances and objectives of the policyholder or grantor, the details of the insurance policy itself, the province in which the policyholder or grantor resides, and the terms and conditions of the trust.
You should always speak with a Canadian estates lawyer and tax professional before transferring ownership of your insurance policy to a trust. Issues to consider include what happens to your policy, filing a tax return for the trust, trustee’s fiduciary duties, protection from creditors, and the impact on your estate in your province.
What Is A Life Insurance Trust?
A trust is a legal relationship between the settlor, trustee, and beneficiary.
A settlor sets up a trust whereby a trustee holds property subject to specific terms and conditions for the benefit of a beneficiary.
You and your lawyer must ensure the roles of policyowner, life insured, and beneficiary align with the roles under the trust. This way the insurer knows who to pay, and the trustee knows they’re complying with the terms.
Three Structures That Are Often Called A Life Insurance Trust
| Structure | How it works | Main trade-off |
|---|---|---|
| Trustee designation for a beneficiary | A policyowner names a trustee to receive insurance proceeds on behalf of a beneficiary, such as a minor. | A simple designation may provide less detailed control than a fully drafted trust. |
| Testamentary insurance trust | The trust comes into existence on death under a will, and the beneficiary designation directs proceeds to the trustee. | The language in the will and policy must align; administration begins after death. |
| Existing or inter vivos trust | The policy could be owned by the lifetime trust, or the lifetime trust could be the beneficiary. | Transfer of ownership, premium funding, access, tax, and filing implications should be reviewed in advance. |
Quebec is a civil-law province, which means that trusts may be treated differently there than they are in common-law provinces. Do not use documentation from a common-law province when doing an estate plan for someone in Quebec.
How A Trust Changes The Payout
Without a trust, the insurer pays the beneficiary. If the estate is the beneficiary, the insurer pays the estate. With a properly drafted trust and beneficiary designation, the insurer pays the trustee, who must follow the rules laid out in the trust.
For example, the trust may require the trustee to use the life insurance proceeds to provide for the beneficiary’s care and/or education. Trusts can also set out when assets are distributed or held for beneficiaries who are minors or need ongoing financial management.
Trusts should also address what happens when a trustee resigns or dies, the trustee’s compensation, investment powers, tax instructions, record-keeping requirements, emergency procedures, and distributions if a beneficiary dies too soon.
Read More: Review How Life Insurance Payouts Work in Canada
Using A Trustee For A Minor Beneficiary
While a minor may be named as a beneficiary of a life insurance policy, they generally cannot control the money they may be entitled to receive. Also, naming a child’s other parent as beneficiary does not require that parent to leave the proceeds to the child.
The Ontario’s Office of the Children’s Lawyer states that an adult can be named as trustee of life-insurance proceeds for a minor. The policyowner may designate a trustee for the beneficiary pursuant to Ontario’s Insurance Act. In Ontario, if the designation has no trust terms, the trustee can generally only hold and invest the money until the child turns 18.
Depending on the circumstances, naming a trustee may be enough, particularly for straightforward situations. Other situations, such as larger sums of money, money left to be held after the beneficiary reaches the age of majority, or broader management powers, may call for creating a trust.
Read More: Compare Revocable and Irrevocable Life Insurance Beneficiaries
Revocable Vs Irrevocable Trusts
Revocable or irrevocable refers to structures rather than products, and Canadian life insurance is a product. Whether a given structure is revocable or irrevocable would depend on the terms of the structure and applicable rules.
Ownership of a policy is a legal question that should not be confused with the question of a structure’s revocability.
An irrevocable beneficiary is a term of art. It has a particular meaning. For example, in Ontario, an adult irrevocable beneficiary under a life insurance policy can prevent the policyowner from changing, assigning, or surrendering the life insurance contract without the beneficiary’s consent. It is not the same thing as an irrevocable trust.
Tax, Estate And Creditor Claims Need Separate Analysis
Where the beneficiary is the estate, insurance proceeds are considered an estate asset and may be available to creditors. Where a beneficiary is validly designated, the insurance proceeds are paid to the beneficiary. In Ontario, designated insurance proceeds are generally not part of the insured’s estate and are not subject to the insured’s creditors’ claims.
The extent of creditor protection during the policyholder’s lifetime depends on the legislation of the applicable province and the facts of each case. Transfers may constitute a disposition under the Income Tax Act. Before signing, ask the insurer for details about the policy’s adjusted cost basis, cash surrender value, and any tax reporting details. The CRA also treats testamentary trusts differently from inter vivos trusts.
Be mindful of how insurance proceeds flow. A situation requiring additional steps to accomplish estate-planning goals could be solved by paying proceeds directly to a beneficiary. Conversely, a solution to an estate-planning issue could create adverse tax consequences or complex T3 reporting.
How Do I Set Up A Life Insurance Trust In Canada?
Determine who may require financial assistance and protection and why a lump sum payout may not be suitable; consider how long the funds may need to be managed.
Determine what life insurance policies are in place; identify who is insured and who owns the policies; identify primary and contingent beneficiaries and determine if these designations are appropriate; determine the policies’ cash values, whether there are loans against them and if they are assigned as collateral on any loans; decide who will pay the premiums.
Meet with a lawyer to discuss whether it would be best to designate a trustee, set up a testamentary insurance trust or pay benefits into an existing trust, pay benefits into your estate, or some combination of these.
Meet with your tax advisor regarding the transfer or assignment of any insurance policies into trust; discuss disposition of your insurance policies, their adjusted cost base, taxation of income in a trust, and filing of T3 trust tax returns.
Decide who will be your trustee and backup trustee; consider investment acumen, recordkeeping, conflicts of interest, place of residence, fees, commitment, etc.
Update beneficiary designations with your insurance companies; the insurance company may require documentation that the trust will be in place if required.
Make sure the will, insurance policies, beneficiary designation forms, trustee names, trusts, etc. are all consistent.
Review estate-planning documents as circumstances change, such as the birth or death of a family member, separation, move between provinces, changes to tax laws in Canada, replacement or assignment of insurance policies, or borrowing against insurance policies.
Life Insurance Trusts Vs Other Estate Planning Tools
| Option | Useful when | Question to ask |
|---|---|---|
| Direct beneficiary | An adult can receive and manage the payout outright | Should there be a contingent beneficiary? |
| Trustee designation | A trustee needs to receive money for a minor or otherwise legally incapable beneficiary. | Does the designation provide enough instructions? |
| Insurance trust | Timing, purpose or long-term management needs detailed terms | Do the benefits justify legal and ongoing administration? |
| Estate as beneficiary | The executor needs proceeds for the estate plan | What creditor and estate-administration consequences follow? |
Read More: Compare a Life Insurance Trust With a Will Beneficiary