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. With this in mind, choosing the trustees is an important process which must result in you being comfortable with your chosen trustees. As the settlor, you have the right to be one of the trustees, if you have decided upon a joint life insurance policy, you and your spouse can both be trustees with the same level of power and rights within the trust. Most, if not all financial advisors will counsel that there should be two trustees at any one time at least, though you can name as many as you desire 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. Ergo one desired quality of trustees is they be at least not older than yourself and be in healthy shape.
So what other qualities should your complete trustee have? Right, legal thresholds to being a trustee first, the nominated trustee must not be or recently have been bankrupt, be mentally capable and be older than 18. Personality traits to look for are someone who has common sense, is methodical and can spare the time to govern 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 justify any spending to the beneficiaries, so the more complete and prepared 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 additional bonus of helping the trustee when you have passed away, as they can back up their explanation of your wishes with documented proof if any of the beneficiaries feel aggrieved by the trust and will target the trustee, when they could not have changed what was arranged in the will. One example we can use is that if you have younger children, in the will you can direct the trustees to make sure funds are used to send them to a privately funded school, the trustees cannot feasibly ignore the directive and must release the funds.
Who should I elect 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 on and you will probably already have a good idea if they will be qualified for the task. Alternatively, the negatives could result in bias towards particular 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 administering of the trust, lack of prejudice is fundamental to being a trustee as they can be a focal point for any grievances beneficiaries might have, it’s something your potential trustee must be primed for. One problem of choosing family members or friends as trustees is that the odds of them having the necessary experience of handling and investing large sums of money are pretty slim; it could even be dangerous to expect them to invest it wisely without this experience. It’s advised in some cases that you have one unprejudiced trustee who can be seen as not being involved with the beneficiaries, this might be the family solicitor. Other possibilities to be a trustee is a professional, such as doctor, priest or teacher which you could also class as only being an acquaintance, your financial adviser will probably suggest having a trustee that is completely apart from friends/family/beneficiaries so they are neutral, a professional would be desirable for this. 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), especially if you have set up a discretionary trust. The trust you establish will no doubt span decades, during that time the friends or family you place as trustees can’t be expected to keep up with any change in trust law, a professional trustee’s job is to know about these changes and what impact it will have on the trustee. Professional trustees, and your solicitor if you choose them, will require a fee for their services, while you may think it’s cheaper having a friend or family member be a trustee, the savings may be negligible if your chosen friend or family member does not have the required experience, resulting in them having to hire a financial adviser or accountant 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 worldwide, 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 forthright 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 are looking for a guardian for your children, do not pick the same person who is a trustee, this keeps the short term objectives of the guardianship and long term goals of the trust do not become mixed, 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 retain “Power of Appointment” and therefore have more scope on how to dole out 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 has to use the finances for the good of the trust, there is no official check to what the trustees can do with the assets. For all trusts not just DT’s, a trustee is not personally responsible for losses as long as they do not 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 accountable 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 selected a friend or family member, it’s usually good form to leave an amount for them in the trust as a goodwill gesture. It also has the supplementary 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 steady growth.
If you’re wondering 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, understanding in certain areas may be needed. So as you can see, choosing a trustee is not about just selecting 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 http://JustLifeInsurance.com a site dedicated to providing free life insurance advice, and market leading life insurance quotes.
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