The Best Way to Choose Life Insurance Trustees

The Best Way to Choose Life Insurance Trustees

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A life insurance trust is the best option, especially for those looking in the over 50′s life insurance market because of the advantages a trust offers in saving tens of thousands in inheritance tax. If you have decided to choose a trust, the choice of trustees can be vital and you as the settlor must be secure in your choice. As the settlor, you have the entitlement to be one of the trustees, with a joint life insurance policy; both the policy holders can be trustees and will be on equal footing. The large majority of financial advisors will counsel that there should be two trustees at any one time minimum, though you can name as many as you require in reality. In the event all the trustees die, the trust does not also die but carries on, meaning the exemptions from Inheritance Tax (IHT) are still in place. However, the trust must now go through probate to re-administer it, meaning fees and a lengthy wait while it is completed, negating one of the advantages of having a trust in the first place. Therefore one desired quality of trustees is they be at least not older than you and be in good shape.

So which qualities should your perfect trustee have? To begin with the minimum legal requirements of a trustee, they must be over 18, be mentally capable and not have been bankrupt. Character traits to look for are someone who has common sense, is organised and can spare the time to direct the trust, as it can be a time consuming task even for a straightforward trust. Beneficiaries must be kept informed; paperwork on any investments must be kept organised and kept up to date while at the same time keeping in line with the obligations of the trust as written and agreed. As when the trust matures, the trustees need to rationalise any spending to the beneficiaries, so the more complete and structured a person is the better. Importantly, you should be confident the trustees you pick would make the choices you would make, or at least have no qualms following the guidelines you set down, for this reason, it is important you have a detailed will to reinforce your desired objectives for the trust. As the trustees must abide by the instructions in the will; it will also have the extra bonus of helping the trustee when you have passed away, as they can back up their understanding of your wishes with documented proof if any of the beneficiaries feel wronged by the trust and will target the trustee, when they could not have changed what was fixed in the will. For example, if younger children are beneficiaries, you can stipulate in your will you want them educated at a certain private school, it is the trustees’ responsibility to see the money is paid.

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Who should I decide on to be a Trustee? The first list of potential trustees you draw up will invariably include family and some close friends; however this it’s not always desirable to settle on a close friend or family. The advantages are clear, they’ll know what you would want when you pass away and you will probably already have a good idea if they will be talented enough for the task. Conversely, the negatives could result in bias towards certain family members/beneficiaries which could lead to challenges on the trustees’ authority. The trustee could also be a beneficiary, leading to a clash of interest in the executing of the trust, neutrality is fundamental to being a trustee as they can be a lightning rod for any grievances beneficiaries might have, it’s something your prospective trustee must be readied for. Another downside could be none of your family members have the required knowledge or experience to deal with large sums of money and, if the objective of the trust is to invest the money, it can be risky to have family members or friends as trustees who don’t know the best ways of investing the money. It’s advised in some cases that you have one independent trustee who can be seen as not holding a bias towards any of the beneficiaries; this might be the family solicitor. Or even someone upstanding in the community that you might know, but isn’t a close friend, a professional such as a doctor, teacher, priest etc. It’s possible to hire a professional trustee, the advantages of this route are they will be experienced in financial investment (if that’s your aspiration for the trust), particularly if you have set up a discretionary trust. While trust law isn’t likely to be changed often, the trust you found will span decades, so it’s not out of the realms it will affect your trust, friends and family might not become aware of changes, but it is part of the professional trustee’s job to know and adjust the trust to any impact it could have. Professional trustees, and your solicitor if you choose them, will charge a fee for their services, while you may think it’s cheaper having a friend or family member be a trustee, these savings could turn into losses, as if your trustees are inexperienced they might need to pay for an accountant or a financial adviser to help with the trust. If you decide to look for a professional trustee, search for one with a TEP qualification (Trust and Estate Practitioner), as it is a recognised qualification around the world, your financial advisor can point you in the right direction if you would like to search for one. It goes without saying it’s wise to have a blunt discussion before hand with your selected trustee, even to treat it as an interview to make sure you are making the best choice. If you and your partner are also sorting out guardianship for children, it’s best not to have the same person as guardian and a trustee as long and short term priorities will become muddled, it also acts as a vigorous checks and balances system, ensuring you children’s welfare would be secure and that of the trust.

Different trustees for different trusts? If you still cannot decide on whom to pick as a trustee, what type of trust you want to establish could help narrow down the field for you. For example, you might just want your life insurance to be paid out in a lump sum or have payments on your death (Term or Mortgage Protection Life Insurance) and if it’s clear who the beneficiaries are, the job as trustee is simpler than being trustee of a Discretionary Trust (DT). Under a DT, the trustees possess “Power of Appointment” and therefore have more latitude on how to disperse the trusts finances. A trustee can manage investments themselves or delegate to someone else, though they retain the only say on distribution to the beneficiaries. While the trustee is required to use the finances for the good of the trust, there is no official control to what the trustees can do with the resources. For all trusts not just DT’s, a trustee is not personally accountable for losses as long as they don’t exceed the total amount within the trust; they are accountable though for losses over the trusts total amount. For example, if the trust loses 120,000 and the trust only had 100,000, the trustees are responsible for 20,000. Trustees have no legal right to be paid (though professional trustees will have a written agreement to be paid), so if you have picked a friend or family member, it’s usually good form to leave a small sum for them in the trust as a goodwill gesture. It also has the additional bonus of making them more cautious with investments for the trust. It’s recommended that trustee’s don’t make any hasty and risky investments, instead going for conservative and sturdy growth.

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If you’re guessing why a DT has been explained, it is to show what skills a trustee will need to run a trust and hopefully help you pick your trustees. It can be hard work and depending on your wishes, experience in certain areas may be needed. So as you can see, picking a trustee is not about just choosing your best friend, brother or wife, you have to make a calculated long term decision to create the secure future for your loved ones.

Debi McGrady works at JustLifeInsurance.com a site dedicated to providing free life insurance advice, and market leading life insurance quotes.

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