There is forever!
Question: I am worried that when I go, proceeds from my life insurance policy will just be easily spent down. Is there a way to manage that? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook
Answer: Stephen Pollan, in his book, “Die Broke” gave the advice that people should not bother leaving a hefty estate for their heirs. In the first place, doing so would require a lifetime of building up assets. Pollan asks why anyone would put the quality of his death before the quality of his life.
In addition, a huge estate will lead to large taxes. The same estate may even lead to family squabbles or, at the very least, not motivate the heirs to work as hard.
But sound as the advice is of Pollan, in many cultures, there is still that desire to leave any form of estate (i.e. properties owned by the decedent at the time of death whether they are real, monetary or intangible and wherever located).
In addition, some like you would like to ensure that the estate they leave behind would last a long time, if not forever. So, when it comes to passing on inheritance, it would be advisable to set up parameters by which the monetary part of the estate will be spent. To this end, people create trusts where a trustee professionally manages and distributes the assets under the trust for the beneficiaries following the instructions laid down by the trustor in opening the trust account. Such instructions will be followed for as long as the trust exists.
However, you will need millions to set up a trust account. Plus, there will be donor’s tax to pay once assets are placed in an irrevocable trust. If you do not pay the donor’s tax and merely set up a revocable trust, the assets in the trust will be subject to estate tax. At the same time, the assets may need to go through a lengthy probate of a last will and testament if the assets are included in such will.
Article continues after this advertisementLife insurance presents one of the most cost efficient and effective ways of leaving inheritance. Small premiums will give huge and almost instant payouts, which will be exempt from the estate tax provided the beneficiaries are designated as irrevocable. And under the Act amending the Insurance Code, beneficiaries of revocable life insurance policies shall be deemed as irrevocable provided no change was made to such policies, thereby rendering payouts also exempt from estate tax. However, the risk of quickly spending down the claim proceeds is present.
Article continues after this advertisementTo take advantage of both worlds, the best vehicle would be to create a life insurance trust or LIT. The assets of the LIT will be the life insurance policies of the trustor that designate the LIT as the irrevocable beneficiary. The LIT will, for its part, have the compulsory heirs of the trustor as beneficiaries.
The trustor pays only a minimal annual maintenance fee for the LIT while the claim proceeds of the life insurance policies have not yet been paid out to the latter. But once the claim proceeds are paid out, the management of such proceeds, in accordance with the wishes of the trustor takes over. A management fee based on the size of assets under management is then applied in place of the annual maintenance fee.
With the appropriate objectives, LITs, which are offered by banks and corporations with trust licenses, can last many lifetimes just like the entities that manage them.
At least with inheritance, there can be forever. INQ
