Insurance-based wealth solutions are often viewed as effective standalone tools for estate and succession planning. However, they do not address every client need in isolation. In practice, broader structures are often needed to achieve long-term planning objectives.
Trusts continue to play a central role in many jurisdictions, particularly where families require certainty of outcome, multi-generational planning, or enhanced asset protection. When used together, trusts and insurance solutions can offer a complementary framework that enhances family wealth structuring, and facilitates co-operation between financial advisers and legal / estate planning professionals.
Where Trusts Complement Insurance Solutions
Trust structures may be particularly relevant in several scenarios, including:
- Planning in common law jurisdictions where trusts are recognised and provide legal certainty
- Dynastic planning for future generations, including those not yet born
- Cross-border wealth transfer, particularly where inheritance tax falls on the recipient
- Asset protection.
In these situations, combining a trust with an insurance solution can enhance flexibility, efficiency and long-term outcomes.
Insurance as a Simplification Tool
Holding assets within a life insurance policy can simplify administration for trustees.
This includes providing a single consolidated valuation for reporting purposes and reducing operational complexity. From a Common Reporting Standard (CRS) perspective, only the policy value and withdrawals are reportable, rather than detailed reporting on each underlying asset.
In addition, the insurer, as a financial institution, is generally responsible for CRS reporting. This can reduce the administrative burden for trustees and help address classification challenges that may arise when trustees deal directly with custodians.
Insurance as an Income Management Tool
Trustees may wish to accumulate income for long-term planning purposes, but trust provisions can sometimes require distributions where beneficiaries have vested rights.
In this context, it may be appropriate to manage the level of distributable income generated within the structure. Using an investment-linked life insurance policy allows underlying returns to accumulate within the policy, even where the underlying investments generate income.
This can provide trustees with greater flexibility, particularly where beneficiaries have differing needs, are resident in high-tax jurisdictions, or where there are concerns around premature access to income.
Supporting Tax Efficiency Within a Wider Framework
Life insurance is typically treated as a capital accumulation vehicle and may benefit from specific tax regimes in many jurisdictions.
These regimes often allow for tax deferral and may provide favourable treatment on withdrawal or surrender. Where policies are held in trust, this can support long-term capital growth without exposing beneficiaries to ongoing taxation or complex anti-avoidance rules.
Life insurance can also enhance outcomes when capital is distributed from the trust. In addition, as the insurer is the legal and beneficial owner of the underlying assets, investment income may benefit from relief under applicable double tax treaties.
Creating Liquidity Within Long-Term Structures
Life insurance can also play an important role in creating liquidity within trust structures.
Variable universal life (VUL) arrangements combine an investment vehicle with a high value death benefit. A key advantage of a VUL policy is the ability for wealth managers to retain assets under management, and to utilise investment returns to fund life cover that provides a lump sum on the death of the insured.
Consider a trust funded with USD20 million. The settlor may wish to draw on this capital during their lifetime while preserving value for future beneficiaries.
In this scenario, trustees could invest in a VUL policy designed to provide an enhanced death benefit of USD20 million. Provided the structure is maintained, the policy can deliver additional capital to the trust on death, thus replacing the original trust capital.
Positioning Insurance Within a Broader Planning Approach
Life insurance and trusts should not be seen as alternative solutions. Instead, they are often most effective when used together within a wider planning framework.
By combining these structures, advisers can help clients create more resilient, flexible and efficient arrangements that can adapt to changing circumstances across generations.
Becoming familiar with how insurance fits into wider wealth planning structures allows investment professionals to retain and increase assets under management. It also enhances opportunities for legal advisers to be more closely involved in the overall structuring and advice process.