When Should I Set Up an Insurance Trust? : Understanding Life Insurance Trusts

This is part 4 of the blog series discussing life insurance trusts and estate taxes.

14. When should I set up an insurance trust?

You can set up one any time, but because the trust is irrevocable, many people wait until they are in their 50s or 60s. By then, family relationships have usually settled – and you know whom you want to include as a beneficiary.

15. Are there any restrictions on transferring my existing policies to an insurance trust?

Yes. If you die within three years of the date of the transfer, it will be considered invalid by the IRS and the insurance will be included in your taxable estate. There may also be a gift tax. Be sure to discuss this with your trust attorney.

16. Can I make any changes to the trust?

An insurance trust is irrevocable, so you can’t make changes after it has been set up. Read your trust document carefully, and be sure it’s exactly what you want before you sign.

Just don’t wait too long – you could become uninsurable. And remember, if you transfer existing policies to the trust, you must live three years after the transfer for it to be valid.

17.  Should I seek professional assistance?

Yes. If you think an irrevocable insurance trust would be of value to you and your family, talk with an insurance professional, estate planning attorney, corporate trustee, or CPA who has experience with these trusts.

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6 Tips on How to Handle the Responsibility and Potential Liability of Being a Trustee (Part 2) by Rob Cohen

Here are the additional tips continued from “BEING A TRUSTEE IS A THANKLESS JOB: Six Tips on How to Handle the Responsibility and Potential Liability (Part 1)” that might help make your trustee-ship progress more smoothly.

4) Examine the inventory. It is not uncommon for people to set up trusts and then do nothing, assuming that since the documents have been signed the trust is effective. This is not accurate; not only must the trust document be executed, but then the assets must be transferred into the trust, (you must “fund the trust”). Failure to fund the trust is especially common with do-it-yourself websites and computer programs; people mistakenly believe that just having a trust is sufficient. Before a trustee can administer the trust, he or she needs to have assets to administer. When examining the assets, here are some action items to consider.

• If the decedent had a safe deposit box, take possession of it and its contents.
• Consult with banking institutions in the area to find all accounts of the deceased.
• Check for cash and other valuables that may be hidden around the home.
• Locate and inventory all real estate deeds, mortgages, leases, and tax information.
• Provide immediate management for rental properties.
• Locate all household and personal effects and other personal property in order to inventory and protect them.
• Collect all life insurance proceeds payable to the estate.
• Find and safeguard all business interests, valuables, personal property, and important papers.

Ultimately, do your best to make sure that the trust’s assets are actually in the trust. If you identify assets that were not transferred to the trust, ascertain whether they should have been.

5) Take emotion out of the equation.In many situations you can be asked to be a trustee for clients, parents, brothers, sisters, and other family members or friends. When the emotional ties are close, you cannot play favorites. As a trustee you have a huge responsibility and significant exposure. Your actions will be scrutinized and challenged by those beneficiaries who feel they were treated unfairly. Your best bet to avoid personal liability is to be unbiased when dealing with trust matters. If you are not sure about your actions and whether they reflect any bias, ask your attorney.

6) Obtain adequate liability and fidelity insurance. No one is immune to lawsuits, and that includes you in your role as a trustee. To protect yourself, obtain errors and omissions insurance, which protects against claims by beneficiaries that you failed to fulfill your fiduciary duty in the management and administration of the trust. Without the protection of errors and omissions insurance, your personal assets could be “exposed” if a disgruntled beneficiary sues you. It is better to have insurance to protect you and your assets.

Being a trustee is not always an appreciated job, but it certainly is a job with tremendous responsibility. Just remember to be mindful of your duties and ask for advice when in doubt. Trusts contain valuable assets, and as dysfunctional families do not get better when someone passes away, trustees easily can become embroiled in nasty litigation. You may not be able to avoid it, but at least you’ll be able to protect yourself.

For more information on trusts, wills, probate, and the role of trustees, contact Rob Cohen at (818) 501-5800 or emal him at rcohen@ahslawyers.com.

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