After the death of someone in a family, trusts are an important tool for attorneys and trustees. They help to simplify the distribution of the deceased person’s assets, and make sure that everything gets to the people it was intended for.
Furthermore, they can help to cut down the amount of estate taxes tied to the process. Although trusts sound like a good thing, there is a catch. The trust will only be as helpful as the trustee who’s been put in charge of it. After you’ve lost a loved one, it’s very important to know that you can trust your trustee!
Like with any kind of trust, a life insurance trust has an identified trustee. In most cases, they do their jobs well. However, there are a lot of instances where conflicts and disputes come up between the trustee and the beneficiaries. This is often down to the trustees having a poor grip on the complex financial situations they’re faced with. Other times, it’s a conflict of loyalty between one beneficiary and another.
Regardless of the situation, there are few constant factors which you can always count on. All trustees have what we call “fiduciary responsibility” to the beneficiaries of the trust. This means that they’re obliged to manage the assets in the trust according to the will of the beneficiaries. This is a big concept in estate planning, and one that should never be overlooked when you’re dealing with trustees.
In any situation, the beneficiaries’ wishes are the most important factor – not those of the person who established the trust in the first place. Although it’s a given, it can often be hard for a trustee to stick to this responsibility. There’s a tangible possibility that the trustee has never met the beneficiaries in the situation. If the trustee is a professional, and not a member of the family, then it’s even more likely that they’ve only met the person who established the trust in the first place.
We come to a pretty important point here. How well can trustees really fill their responsibilities to someone they’ve had no contact with?
If you’re a trust-owned life insurance beneficiary, then you’ll want to maximise the amount of wealth that comes down to you when the assets are distributed. This means that the trustee will have to actively manage the life insurance policy which is owned by the trust. If you weren’t already aware, the ownership may be transferred to a trust to cut down estate taxes. You can read more on changing life insurance ownership at www.investopedia.com/ . Here, “active management” means that the trustee will need to determine whether the policy is playing out according to the projections in the original policy illustration.
Unfortunately, these illustrations often have exaggerated assumptions, which will lead to the policy underperforming. Lacklustre investments can also be a big hindrance to the life insurance policy. Sometimes, economic factors affecting the insurer are another big stumbling block. In the course of the trustee’s work, the trustee may have to identify alternative policies, more aligned with the wishes of the beneficiaries.
Be aware that some changes in the life insurance industry has made a lot of older policies obsolete. If you know the policy you’re dealing with wasn’t updated that regularly, then you should be looking at all the alternatives.
So, is your trustee really fulfilling their duties? Unfortunately, there are a lot of trustees who don’t have the skills required for the position. A lot of people who set up life insurance trusts are hasty to assign a trustee. They jump to the first friend or relative who seems like they can be trusted. While I understand the logic, a lot of these people don’t have enough knowledge or experience to be prudent with life insurance.
Other people will choose an advisor who’s proved themselves in the past. This might be a financial advisor, accountant or lawyer. However, as with a friend or family member, they may not have the specialised knowledge required for the task. It doesn’t matter if the trustee is a family member, a friend of the deceased or a professional. There’s a fair chance that they won’t step up to their fiduciary responsibility.
Although there’s a possibility of this happening, it’s not something you have to lie down and take! Like lawyers, doctors and other professionals, there are certain regulations and ethical standards tied to being a trustee. If it comes to it, there are law firms such as www.aldavlaw.com/ which specialise in bringing trustees to account. There are many regulations which bind a trustee to their duty. However, these can easily be forgotten if no one takes an active role in enforcing them!
You need to get a grip on the trust situation by asking them the right questions. Find out how the policy is panning out, relative to the original illustration. Ask them when the policy was last reviewed by the deceased, and what this means for the estate planning. If the policy seems to be falling short, talk to the trustee about the possibility of other available policies. This can sometimes feel like a long shot, but may end up getting you closer to the ideal the beneficiaries are going for.
It’s also important to check out the business credit rating of the insurance company in question. This can have a huge impact on how the life insurance policy is actually executed. If there are any sub-accounts, try to find out if they’re still aligned with the investment statement. If the trustee is scrambling to provide this information, then it may be time to take the responsibility off their hands!
While a lot of trustees can be completely reliable, there are others who really don’t know what they’re doing. If you’re worried about the way things are panning out with a life insurance policy, then the best thing you can do is read up on being a trustee. The more you understand about the position, the easier it will be to tackle complications.