The Life Insurance Trust. proof

Transcription

1 P l a n n i n g Y o u r E s t a t e The Life Insurance Trust

2 All too often, life insurance planning comes to a halt once an adequate amount of insurance has been purchased. Many people never consider what will happen to their insurance proceeds after they are distributed. Are your spouse, children, grandchildren, or other beneficiaries used to handling the large sums frequently paid under life insurance contracts? Will they know how to invest such amounts wisely? Or, through inexperience or lack of proper guidance, will they make costly errors that will adversely affect the financial security you have planned so carefully to provide? ninsurancen Planning Insurance planning is like any other assignment or project. You must complete several steps in sequence before the task is finished. The First Step The first step is deciding how much insurance you need. You can use one of several common rules of thumb for determining your optimal life insurance coverage. One of these rules calls for life insurance in an amount equal to five times your annual salary. Another suggests that you have sufficient life insurance to replace 75%-80% of the after-tax

3 income needed by your beneficiary if the beneficiary will have minor children to support, or 65%-70% of needed income if the beneficiary won t have to care for minor children. However, because each person s individual and family needs are different, adequate coverage may not be secured through the use of simple formulas. To determine how much life insurance you need, you have to answer the question: How much income will my family need to maintain the income level I think they deserve? Answering this question requires an in-depth analysis of your family s needs and circumstances. Your insurance advisor can help you with this analysis. And we d be happy to assist in any way we can. The Second Step The next step is choosing the right kind of insurance to meet your needs. All insurance policies agree to pay an amount of money if you die. But all policies aren t the same. There are three basic types of life insurance: Term Insurance. Term insurance is death protection for a term of one or more years. Death benefits are paid only if you die within that term. Some term policies are convertible. Any time before the end of the conversion period, you may trade the term policy for a whole life or endowment insurance policy, even if you aren t in good health. Whole Life Insurance. Whole life insurance gives death protection for as long as you live. The most common type is called straight life, permanent, or ordinary life. You pay premiums for life or until you cancel the policy. Policies with cash values may be used as collateral for loans. Endowment Insurance. An endowment insurance policy pays you the policyholder a sum if you live to a certain age. If you die before reaching that age, the death benefit is paid to your beneficiary. Other insurance products are available in addition to these basic types. The Third Step The third step is thinking about what will happen to your life insurance proceeds once those proceeds have been distributed. If you are at all unsure about how well your beneficiaries will manage the proceeds, you should consider a life insurance trust. A Typical Life Insurance Trust Like all trusts, a life insurance trust is a legal arrangement. But don t let that discourage you. Life insurance trusts are easy to set

4 up: You, as the grantor of the trust, name the trustee of the trust (usually a financially sophisticated advisor such as our organization) as beneficiary of any insurance policies placed in or purchased by the trust. When you die, the trustee collects the insurance proceeds, invests them prudently, and distributes trust income and principal to your family or other trust beneficiaries according to the directions you have given in your trust agreement. With a life insurance trust, you decide when, in what amounts, and in what manner the insurance proceeds and/or the income generated by those proceeds will be distributed to your beneficiaries. In short, you, the insured, make the major decisions regarding the disposition of the trust fund. Life insurance trusts may be revocable. You can amend or even terminate this type of trust arrangement at any time. Or they can be irrevocable, in which case you can t reserve the right to terminate the trust or change the trust s terms. nadvantage Onen Flexibility Just how flexible is a life insurance trust? Consider these points: A life insurance trust gives you more leeway in determining how your proceeds will be distributed. For example, you can give your trustee the discretionary power to invade the trust principal in the event of a family emergency or to finance a child s or grandchild s education. Thus, if your family (or other beneficiaries) needs additional funds, your life insurance trust can provide them. Most insurance companies, on the other hand, offer only a limited number of distribution options. You choose your trustee. By naming a trustee who is experienced in investments and other financial matters, you can be certain that the insurance proceeds will be professionally managed and invested according to your beneficiaries needs and your stated objectives. The trust can protect the interests of minor children without the expense and complexities of court-appointed guardianship. Your trustee can use the trust assets on behalf of your children in essence, acting as guardian of the insurance proceeds. A life insurance trust can unify your estate plan. When you die, your will can provide for the remainder of your estate assets (after taxes, expenses, and claims are paid) to be poured over into the life insurance trust so that all your assets can be administered by a single trustee.

5 Advantage Two nestate-tax Savingsn nselecting an Trustee A life insurance trust can also save you estate taxes. While the federal estate tax is scheduled for repeal in 2010, it remains a threat until then. Moreover, unless Congress acts, estate taxes will reappear in So, setting up a life insurance trust can still be an effective estate-tax saving device. But you have to meet strict requirements: You must transfer the insurance policy to the trust more than three years before your death, or the trust, itself, must purchase the policy (certain other requirements apply). You must not have any incidents of ownership in the life insurance policy (such as the right to change the beneficiary). Once the trust is set up, you can t exercise any control over the policy or retain any rights to ownership of the insurance. You must make the trust irrevocable. The benefits cannot be payable to your estate. If your life insurance trust is properly implemented according to Internal Revenue Service requirements, your life insurance proceeds won t be included in your estate. The funds will be fully available to your beneficiaries. What qualities should you look for when choosing a trustee for your life insurance trust? Competence Experience Impartiality Availability We possess them all. We have been administering trusts of all types including life insurance trusts for years. We have both the knowledge and the experience necessary for the proper administration of a trust. The investment expertise of our investment officers is difficult to match. As trustee, we are impartial in making investment decisions and in dealing with your beneficiaries. We exercise unbiased judgment and follow your directions as contained in your trust agreement to the letter. Our trust representatives are readily available. We like to view ourselves as a financial companion for your family someone they can turn to for advice and comfort as well as for financial security. Moreover, our organization won t go on vacation, move away, die, or be distracted by competing personal concerns, all of which may happen with individual trustees.

6 We are in the business of administering trusts full-time and year-round. And we do so with a high level of skill and professionalism. Should you have a life insurance trust? The answer to that question depends on your personal situation the size and complexity of your estate, your beneficiaries financial experience (or inexperience), the ages of your children, and so on. We can help you come up with the right answer. Why not contact us soon? Copyright 1996, 1997, 2001 by NPI 3:6 (9/01)