Where’s the plan?

Death is one of the certainties of life and many people take out life insurance for the main purpose of providing for their dependents or for business succession funding.  All too often insurances are put in place but there is no plan to deal with the monies.

Putting in place the insurance is one step in what should be considered a two-step process.  The second step is putting in place an estate or business succession plan to ensure the benefits of the policy are paid as intended to the right beneficiaries and in the most tax effective manner.

The recent case of Hawcroft General Trading Co Pty Ltd v Hawcroft[1] highlights the risks associated with not having an effective business succession plan to deal with the proceeds of life insurance on the death of a business owner.  In that case, the company Hawcroft General Trading Co Pty Limited (the Company) owned a life insurance policy in the amount of $2,231,274.34 on the life of Martin Hawcroft who died in 2012.  The deceased, up until death, was one of the directors and shareholders of the Company and was instrumental in the development and success of a hotel business which was operated through the Company.

A question arose as to who in fact was entitled to the proceeds of the life insurance policy on the death of the deceased as there was some suggestion that the proceeds of the policy had been assigned from the Company to the deceased.  The Supreme Court of New South Wales was asked to determine if the Company was entitled to retain the proceeds of the policy or if the Company was bound to distribute the proceeds to the estate of the deceased.

At first instance, the trial judge ordered that the proceeds were payable to the estate of the deceased.  The Company appealed the decision.   The New South Wales Court of Appeal reviewed a number of corporate documents referring to the life insurance, the life insurance policy itself, agreements and deeds entered into between the directors of the Company and the widow and concluded that the proceeds of the life insurance were owned by the Company.

The case illustrates the difficulties which can arise when there is no proper agreement or plan between business owners detailing the purpose of life insurance, who’s entitled to the proceeds on death and who’s to maintain and pay the premiums.  The case also highlights the taxation consequences in not getting the ownership of life insurance right.  Businesses who take out life insurance may be subject to income and capital gains tax liabilities depending on how the proceeds have been applied and who benefits from the proceeds on death.

It’s not just business owners who need to ensure that there is a plan to deal with the proceeds of life insurance.  Many mums and dads with young children want to ensure that the surviving spouse and dependent children are financially provided for.   An effective estate plan can provide a strategy to ensure that financial dependents will benefit from the life insurance proceeds in the most tax effective way and with the best asset protection possible.

The taking out of life insurance should be viewed as the first step in a two-step process.  A failure to put in place a plan to deal with the proceeds on death means that the process is incomplete.  Not having a plan can cause disputes, unnecessary taxation consequences and loss of asset protection.

Life insurance advisers and those with life insurance should ensure that step-two of the process is also completed when life insurance is taken out or reviewed.

[1] [2017] NSWCA 91

Marie Brownell

Head of Private Client Services

Accredited Specialist (Wills and Estates)

[email protected]