TRUST YOUR INSURANCE

Most financial advisors endorse the idea of owning sufficient life insurance to supply necessary funds to provide for the comfort and support of the family and to pay estate debts and taxes. Too often, however, life insurance planning ends once an adequate amount of life insurance has been purchased. The question of what will happen to the insurance proceeds after death is seldom considered. Acquiring sufficient life insurance coverage should be only the first step to be taken in estate and life insurance planning.

The second step, and often most important, is providing for the disposition of those insurance proceeds after death. It is quite possible that a surviving spouse, children, grandchildren, or other persons whose financial security is important may be dealing with such large sums of money for the first time. Given the dollars that are frequently represented by insurance payouts, will they know how to invest such amounts wisely? It is possible, through inexperience or lack of proper guidance, they may make costly errors that will adversely affect the financial security so carefully planned. Those who are not sure of the answers to these questions should seriously consider the creation of a life insurance trust.

Like all trusts, a life insurance trust is a legal arrangement through which one party (the “trustee”) holds and manages assets for the benefit of another party (the “beneficiary”). With a life insurance trust, the creator of the trust names the trustee of the trust as beneficiary and/or owner of insurance policies. When the insured dies, the trustee collects the insurance proceeds, invests them prudently, and makes distributions of income and principal to the family (or other trust beneficiaries) according to the instructions set forth in the trust agreement.

The advantages of a life insurance trust are several:

• With a life insurance trust, the creator and trustee determine when, in what amounts, and in what manner distributions of the insurance proceeds - or the income that will be generated by those proceeds - will be made to the beneficiaries.
• A life insurance trust allows for greater flexibility of distribution than most insurance company settlement options can be expected to provide. For example, the trustee of a life insurance trust can be given the discretionary power to invade the trust principal in the event of a family emergency or to finance a child’s education.
• Where minor children are named as trust beneficiaries, the insurance proceeds can be used on their behalf without the expense and complexities of court-appointed guardianship.
• A life insurance trust can be used to unify an estate plan and can, under certain circumstances, afford the estate favorable tax treatment by keeping the proceeds out of the decedent’s taxable estate.

By naming a trustee who is experienced in investments and other financial matters, the creator can be certain that the insurance proceeds will be professionally managed and invested in accordance with the beneficiaries’ needs and the trust objectives. Be sure to check with your financial advisor or life insurance professional about the possibility of controlling the ultimate distribution of your life insurance proceeds for the benefit of your heirs.

Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC