The biggest fear many of our clients have when transferring their assets to an irrevocable life insurance trust is one that’s completely understandable. In order for these trusts the work the way they should, these people have to give complete control of the assets within the trust to someone else, and they can’t take it back. That lack of control can be stressful for a lot of people. After all, a trustee is called a trustee for a reason – you’re entrusting that person with a huge amount of responsibility for your money. Choosing a trustee is possibly the most important decision you’ll have to make when setting up your trust, especially because you can’t choose the person you likely trust most – your spouse.
Why You Need A Trustee – and Who You Can’t Choose
The whole point of buying and selling life insurance policies through an irrevocable trust is to keep them out of your estate. For the money to be considered outside of your estate, you have to avoid what the IRS calls “incidents of ownership.”
“Incidents of ownership” simply means control. If you have any control over what can be done with those funds, that makes you an owner of the trust for estate tax purposes. Incidents of ownership extend to spousal control, which means that if your spouse is the trustee, the trust is still considered within your marital control.
Having any control at all over that trust, even in the form of a spousal relationship, negates the point of having the trust in the first place. For many of our clients, that’s a problem, as the only person they trust with their money is their spouse.
The person who manages a trust becomes a fiduciary, which simply means they have a responsibility to always act in the best interest of the beneficiaries. This legal responsibility can open them up to liability if the funds are mismanaged. That’s why some people choose to go with a financial advisor or lawyer to manage the trust. In this case, there will be a fee, but that’s permitted in a fiduciary relationship, so long as it’s disclosed.
Picking the Right Fiduciaries
Basically, there are two categories of trustees you can consider: fee-based trustees or personal trustees. Personal trustees are usually close family members or friends. If you go with a personal trustee, the person you choose should have a strong understanding of your estate or assets. Many people choose heirs for this position, since that’s who will carry on the business or otherwise manage the money, anyway.
If you choose an heir, you don’t need to choose an expert. You just need to look for someone who’ll have at least enough knowledge of your assets and desires to know when to consult an expert. They’ll need to be responsible and have a history of prudent money management. And finally, they need to have the time to dedicate to the task.
When you assign a family member or friend as a trustee, you might also want to assign a co-trustee. Some people name a corporation or professional as a co-trustee, which allows for an advisor relationship within the trust. The trustee can ask the co-trustee to make decisions or sign off on certain things when they’re unable, which allows the trust to stay within a family while limiting the responsibility of the main trustee. Another option is to simply name a business or professional as the trustee, which is usually ideal for managing very large estates.
The Benefits of Paying a Trustee
There are two ways to create a paid trustee relationship. You either hire a management firm to advise your named trustee, or you use a professional trust manager. Most state laws allow someone to take a reasonable amount of compensation from a trust for managing it. Since the trustee has all the rights and control of the trust, they can set that payment. If you’re having an heir do it, you might want to set up a separate management relationship to assist them. In this case, the management firm would file the appropriate paperwork and help the trustee make decisions, but the family member would always have final say. This is a good option for keeping control within the family, while balancing out the complex tasks involved.
The next option is having a professional actually being the named trustee. The benefit of this is that you’ll have a disinterested third party who’s capable of making unbiased decisions. Estate management can often be very emotional and there have been countless cases of family members going to probate court and tying up estates for years over relatively small amounts. To avoid this, a professional firm can manage the trust and hand out the benefits to the beneficiaries as needed.
Whether you’re having a family member manage the trust or choosing a professional trustee, the key is planning. Discuss the choice with your heirs to see what they would prefer and start looking at firms with a good reputation in asset management. For more information on choosing the right trustee or financial advisor to advise your trust, contact a Howard Kaye advisor at 800-DIE-RICH.
