What is a Standby Insurance Trust
Another type of insurance trust is a standby insurance trust. Similar to an insurance trust, a standby insurance trust also uses the insurance proceeds rights as the trust property. However, unlike an insurance trust where the policyholder is the trustee, for a standby insurance trust, the policyholder remains the settlor himself/herself. The trust merely acts as the beneficiary of the policy without holding the policy. It is called a "standby" trust because before the insurance proceeds are transferred into the trust, the trust does not hold any assets and remains on standby. Only when the insured event occurs triggering the payment of insurance proceeds into the trust does the trust get activated.
The operation mechanism of a standby insurance trust is as follows:
After the settlor establishes a standby insurance trust with the trust company, the beneficiary of his/her policy is changed to the trust. When the insured event occurs and insurance proceeds are paid out, the insurance company pays the proceeds to the trust, activating the trust. The trustee then manages, invests, and allocates the trust assets to the beneficiaries according to the trust agreement signed with the settlor and the letter of wishes.
After being activated, a standby insurance trust operates like a normal insurance trust. Before activation, the main differences between an insurance trust and a standby insurance trust are in the following two aspects:
- Asset Isolation: For a standby insurance trust, the policyholder is the settlor himself/herself, and the policy belongs to the personal assets of the settlor. For an insurance trust, the policyholder is the trust, and the policy is not part of the personal assets of the settlor. In this case, the insurance trust provides certain asset isolation functions to avoid future claims by creditors.
- Trust Fees: Before being activated, a standby insurance trust only acts as the beneficiary of the policy without holding any assets. Therefore, the trustee does not need to manage any trust assets, and the settlor only needs to pay a lower administrative fee. For an insurance trust, the policy is a trust asset. Even if no insurance proceeds have been paid out, the trustee still needs to manage the trust assets, so the settlor has to pay the normal administrative fee.