There is security in knowing that your beneficiaries will receive life insurance proceeds should something happen to you. But will they need assistance to manage and invest those proceeds properly?
There is flexibility in a Life Insurance Trust. Many traditional insurance policies limit your number of beneficiaries. But, if you direct the proceeds into a trust, you then can channel your distributions to any number of different beneficiaries and provide for future generations.
By placing your life insurance in trust, you ensure that there is no time lag between collection and investment of proceeds funds will go to work immediately for your beneficiaries. And, you spare your beneficiaries the anxiety of handling large sums at a time when they may be unable to cope with major decisions.
When a Life Insurance Trust is properly structured and managed, proceeds of the policies held in the trust may not be subject to probate. Thus, the trust can create liquidity for settlement expenses and estate taxes.
Designating a Trustee
By creating a trust, you are placing your assets, your wishes, and the welfare of your family in the hands of your designated trustee. Choosing the right person or institution to fulfill this important role is imperative. To make an informed decision, you should first understand the complexities of the role of the trustee.
A trustee is an active, integral part of the trust relationship. When named as a trustee, an individual must assume the following types of responsibilities:
- Maintenance and investment of assets
- Recordkeeping and accounting
- Transaction and investment reporting
- Tax preparation and filing
- Discretionary and non-discretionary distribution of assets
Even from this abbreviated list, it is easy to see that the role of the trustee demands serious, dedicated attention. Who can you trust with your familys financial future? Remember, a trustee can be either a person or an institution. It is important to weigh your options carefully. When making your decision, look for the following characteristics:
Select a trustee who will not be swayed by self-interest in the interpretation of trust provisions or in the management and distribution of assets. Usually a professional fiduciary, rather than a family member, provides the best assurance of this.
- Investment Expertise
The trustee is responsible for investing the assets of the trust until they are distributed pursuant to the terms of the document. By selecting someone with extensive investment experience and resources, you can have confidence that your assets will be appropriately managed and conserved for your beneficiaries.
- Tax and Accounting Expertise
Transaction and investment reporting as well as tax preparation and filing are important roles of the trustee. To ensure that this detailed work is done in an accurate and timely manner, it is best left to an experienced person or institution.
If an individual is named as trustee, other personal commitments, as well as illness or incapacity, may hinder the ability to conduct the affairs of the trust. A trustee's duties encompass several areas of expertise which can be intimidating to an individual. For many, the hiring of a professional fiduciary like Northern Trust reduces stress and anxiety, as well as the workload.
Where to Go From Here
Getting your affairs in order is important. Following is a summary of the steps involved in creating a Life Insurance Trust. Your accountant, attorney, and estate planning professional will guide you through the various tasks associated with each step.
- Determine Your Needs
First, ask yourself how you want your assets managed after your death. If you already have a will in place, think about how a trust might ensure your wishes are followed and the possible estate tax benefits are realized.
- Identify Beneficiaries and Distribution Options
Name the individuals and charitable concerns to whom you would like the trust to make distributions after your death.
- Select an Attorney
It is important to identify an attorney with extensive experience in estate planning. Northern Trust can recommend a number of qualified attorneys.
- Select a Trustee
This individual or professional trustee will be responsible for administering your assets after your lifetime. You might elect to name an individual and a professional fiduciary to serve a co-trustees. If you name an individual, you also should name a successor trustee in the event of the original trustee's incapacity or demise.
- Draft Your Trust Agreement
Work with your attorney to draft a document that achieves your estate planning objectives and reflects your personal intentions. File a copy with your trustee and successor trustee. A typical trust agreement covers, among others, the following points.
- Designation of the trustee.
- A statement of the terms under which the trust agreement may be amended or revoked.
Remember, the trust becomes irrevocable after your death. (To be effective, any amendment or revocation should be placed in writing and filed with the trustee.)
- A statement of the investment powers granted to the trustee, as well as authority to distribute principal and income.
- Designation of a successor trustee.
(This provision is necessary only if an individual is named as trustee.)
- Instructions for distributions of assets.
Expense and Effort
Your attorney will, of course, charge a fee for drafting your trust agreement. Once the trust is established, it is wise to consult periodically with your attorney to ensure that your estate plan and tax strategies remain up to date.
How to Find out More
If you would like additional information on Life Insurance Trusts, please get in touch with us. A Northern Trust financial planning professional would be pleased to assist you.
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