Principal Issues: Is a trust that is settled with the proceeds of a joint last-to-die life insurance policy a testamentary trust?
Position: Yes.
Reasons: Consistent with previous positions
CRA Questions
CALU 2008 Annual Meeting
Question 5
Use of a Joint Last-to-Die Policy to settle a testamentary trust
Life insurance policies have many uses in estate and financial planning. One use of life insurance proceeds is to settle a trust for the benefit of children or grandchildren. The CRA has confirmed in the past (Document No. 9605575) that a trust settled with life insurance proceeds can qualify as a testamentary trust.
The question has arisen as to how a joint last-to-die policy would be treated where the policy is jointly owned by a husband and wife (or common-law partners). Where a policy is jointly owned, it must be dealt with jointly meaning that two signatures are required in respect of policy transactions, including beneficiary designations.
However, after one spouse dies and the other spouse becomes the sole owner of the policy (that is, the policy passed to the surviving spouse by right of survivorship), that spouse could change the beneficiary designation.
Question:
In the CRA's view, would a trust settled with the proceeds of a jointly owned last-to-die life insurance policy qualify as a "testamentary trust", as defined in subsection 108(1) of the Act if the trust was designated by the spouses jointly and the surviving spouse makes no change to the designation? Assume the trust is settled in the same manner as that set out in the above noted technical interpretation.
Response
A testamentary trust is a trust that arises on and as a consequence of the death of an individual with certain exceptions. One of these exceptions is a trust created after November 12, 1981 if, before the end of the taxation year, property has been contributed to the trust otherwise than by an individual on or after the individual's death and as a consequence thereof.
As previously stated by the CRA at this conference and in other technical interpretations issued by the CRA, a trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely by reason of the receipt of the proceeds of an insurance policy on the life of that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.
In the case of a joint last-to-die life insurance policy where the only amount that is payable to the trust under the policy is paid on the death of the last of the two persons insured under the policy, our position would be the same - that is, a trust created from the receipt of the proceeds of such a policy will not lose its testamentary trust status solely by reason of the receipt of the proceeds of that insurance policy provided that the life insurance policy is owned by the individual who survives the other immediately before his or her death and the policy qualifies as a testamentary instrument of that person at that time.