Every business requires some form of investment and enough customers to whom its output can be sold on a consistent basis in order to make a profit.
“I have enough life insurance to bury me.” That’s what most people tell me. Many of my customers can talk easily about stocks, bonds, and real estate, but they often don’t understand the many usages for life insurance besides a death benefit. In my experience, these benefits are usually discovered only after it’s too late…….
Source: Life Insurance For The Living?
Regardless of whether or not you are subject to the estate tax, it is essential to have a current will and related documents. I recently wrote two articles on the sticking points that can cause well-intended adults to delay the execution of their estate plan: Choosing an Executor of your Estate and Naming Potential Guardians for Minor Children.
Another common consideration is determining the appropriate time for children to have access to their inheritance. Although my focus here is on distributions from trusts created by a will (testamentary trusts), these considerations also apply to trusts created during your lifetime (inter-vivos trusts).
A major distinction between your will and lifetime irrevocable trusts is that; during your lifetime your will can be regularly updated to reflect current thinking, while amending or changing provisions within a lifetime irrevocable trust will generally be more restrictive and often require a statutory solution (decanting), where possible, or having to seek permission from the courts.
Generally, distributions can be discretionary, mandatory or event-driven. For most (with high confidence in a trustee), I recommend a combination of allowing for both mandatory and discretionary powers to make distributions – assuming the facts and circumstances allow for it.
The most common distribution structure we’ve seen over time seems to include mandatory distributions at specified ages – i.e. ages 25, 30 and 35. This could mean that one-third of the principle is distributed at age 25, one-half of the balance at age 30, and the remaining balance distributed at age 35.
Prior to or between mandatory distributions, the trust can provide that the fiduciary has the power to make either fully discretionary distributions or distributions under some “ascertainable standard,” such as for the beneficiary’s health, education, maintenance and support (HEMS). The power to distribute can be very broad (absolute) or narrow – the HEMS standard is a statutory standard that lies somewhere in between and may provide certain tax protections.
I find it interesting that clients with young children often initially choose ages 25, 30 and 35, only to then stretch out the ages of mandatory distributions as both they and their offspring age. This implies that any initial confidence the parents had in their children’s ability to handle large sums of money early on (e.g. age 25) dissipates as the distribution becomes more imminent and, perhaps, the monetary sum increases.
A common alternative is to allow for a portion of the principal to remain in trust for the beneficiary’s lifetime, while granting current beneficiaries the power to appoint future beneficiaries (e.g. descendants). Putting aside one’s choice of ages of distribution, I favor a hybrid approach that combines some mandatory distributions with the ability to make discretionary distributions for assets in continuing trusts. To me, this approach stands out for its flexibility and asset protection benefits.
Specifying only mandatory distributions or event-based distributions (i.e. earning a degree, marrying, passing drug screens, etc.), greatly reduces the fiduciary’s flexibility. As a fiduciary for many estates and trusts, I often see inflexibility as an unnecessary impediment to a more successful plan particularly when a beneficiary’s life circumstances change.
For example, recently a beneficiary with a medical degree finished his residency and chose to specialize in high-risk surgery. As a trust provides a significant degree of asset protection, I would have preferred that at least a portion of the principal remain in trust for the beneficiary’s lifetime. This would have been most beneficial to the beneficiary given his exposure to potential future liability due to his choice of profession.
Of course, decisions with respect to trust distributions include both the principal (as discussed above) and the income that is generated by that principal. It has been common to allow income distributions at age 21 or some other age. However, it should be noted that when an estate plan is designed, you may be unsure of the ultimate size of the children’s inheritance, thus requiring mandatory income distributions (or principal distributions) that may lead to very large distributions at relatively young ages.
An alternative approach can be to designate an income stream in today’s dollars, and then build in a cost of living adjustment to account for inflation. Even better, perhaps, would be to allow for income distributions to simply be at the discretion of the trustee. By giving greater flexibility to the fiduciary, distributions can be made based on the requisite need at the time.
Overall, there is not a “one size fits all” solution to these situations. It is of paramount importance to invest the appropriate amount of time, thought and care when drafting these documents. Doing so will help to lay the groundwork for more favorable outcomes later in life that ultimately better reflect the grantor’s initial intentions.
In the life insurance area of financial services the answer is even tougher to find than usual, because insurance is for virtually all consumers an absolute grudge purchase. When we think about it logically every person who buys insurance (especially life or disability insurance) hopes that they are wasting their money…the last thing they want is a claim, isn’t it?
Simplistically it seems obvious enough that customers want money to turn up quickly and painlessly to help a surviving family or business adjust to the loss of a person. That’s the end result that customers are looking for of course, but the more vexing question at the front end of the process is what do customers want when trying to determine which insurer should be chosen?
The research that I have seen during the last 5 years shows that there are common themes globally, regardless of cultural or geographic or demographic issues. The primary areas of concern for consumers are:
Each of these areas can be considered from two different perspectives: Product, and, People.
Generally consumers want to be able to make good choices through comparison, to determine relative value. An ongoing issue in life insurance is the difficulty for consumers to easily compare different options and products, despite the prevalence of online pricing comparators that have evolved in recent years. Comparing price of the products remains relatively meaningless if the consumer is unable to differentiate the products themselves from each other in terms of how they work, or might be expected to perform.
The terminology that the industry uses contributes to the lack of simplicity for consumers, but so too does the inability to explain in clear terms why a particular product might be superior or unique, or why the pricing is what it is.
This lack of simplicity and transparency in product undermines the general desire to establish a commercial relationship based upon trust, as the complexity actually generates levels of distrust. The majority of consumers know full well that the life insurance is likely to be something which they hold for many years, so establishing trust in the insurer and the product at the outset is a major factor.
So too is the expectation of loyalty from consumers according to the research. The customers expect largely to have some form of loyalty recognition built into the insurance-customer relationship that rewards the years of patient premium payment. This is an area where generally the product manufacturers perform pretty poorly.
People
The second key area where these core consumer needs must be met if the industry (and its products) wants greater support and participation from consumers is from the people representing the industry and its products.
Without doubt there has been significant focus upon the “transparency” issues for advisers in recent years, largely as a result of evolving professionalism across the industry globally, supported by regulatory reform. Yet, the research suggests that consumers feel that the industry is not yet transparent enough. And that extends well beyond just the advisers these days.
There is a growing public perception that the people inside institutions, and indeed the institutions themselves, are not transparent enough. Of course many on the distribution side of the fence (the advisers) actually agree with the consumer here.
The complexity that remains within product and pricing presents opportunity for industry professionals to demonstrate value and meet a core customer need, thought to do that successfully requires establishing the required levels of trust. Higher levels of transparency from all parties in the product design, implementation and servicing chain will assist with establishing higher levels of trust, but so too will greater simplicity in terminology and improved communications with the market at large as well as individual clients.
For all the technical excellence which has been created, it seems apparent that consumers are not giving the industry a pass mark on simplicity. Or transparency. Or communications. And we certainly do not appear to be on loyalty to long-standing customers either. One can only conclude that the pace of change and the use of technology to increase financial literacy and place information together with control of personal data into the consumers hands will escalate.
Silicon Valley is building the new-world insurance agent. My grandfather started selling insurance in the 1950s and insurance eventually granted him the American dream. Today, the industry accounts for 7 percent of U.S. GDP, with more than $1.1 trillion of net premiums paid annually. The aged way of conducting business is pushing the Valley to…
via The new-world insurance agent — TechCrunch
