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Trust-Worthy Insurers.

Trillions of dollars are expected to pass from one generation to another in the next decade. While some insurers have started offering trust services to keep a hand in the pot, others are steering clear for now.

The demand for estate planning will continue to grow for many years as Americans who amass wealth begin to grapple with the problems of bequeathing it to the next generation. In response, some insurers have been opening thrifts specifically designed to offer trust services. For agents and brokers who write insurance for those companies, these new thrifts offer both advantages and challenges.

By midyear, for example, New York Life Insurance Co. will open its federal savings bank, New York Life Trust Co. FSB, in Parsippany, N.J. Under its federal thrift charter, it will be able to offer personal trusts in all 50 states. The company plans to enter the personal trust market with a bundled irrevocable life insurance trust service. The company also will be prepared to support the various trusts funded by the death benefits of matured life insurance trusts.

That's good news for William Van Winkle, one of New York Life's top producers, who is based in Tinton Falls, N.J. "It's something we've wanted for a long time," said Van Winkle, a longtime member of the Million Dollar Round Table, an organization for high-performing agents. "It makes sense for the agent in that we maintain a relationship with the money under the New York Life umbrella. It also makes sense for the family in that they have an adviser that knows the genesis of the trust, what their mother and father intended when they formed it."

But the New York Life example doesn't necessarily hold for all insurers that have formed thrifts. Producers who have developed relationships with attorneys, accountants and banks may not want to burn those bridges by funneling new business to their insurance company's thrift. And even New York Life will not require that its career agents use its trust company.

According to the U.S. Office of Thrift Supervision, 33 insurance companies have received thrift charters, and at least 10 charters are pending. Many of those thrifts will offer traditional banking services such as savings accounts, certificates of deposit, loans and checking--but not trust services. Those that will offer trusts recognize that the demand for such services is likely to rise in concert with estate planning.

A trust is a legal arrangement in which property is held and maintained by a trustee for beneficiaries, and it can be used to place assets outside of an estate and, therefore, reduce estate taxes. According to Boston College's Social Welfare Research Institute, $12 trillion to $18 trillion of wealth will be inherited from 1998 to 2017. Without estate planning, 37% to 55% of amounts over the legal exemption would be lost to federal estate taxes. Estates worth up to $675,000 this year are exempt from estate tax; that amount is scheduled to rise to $1 million by 2006.

In 1998, the federal government collected $24.1 billion in estate tax, about 1.4% of total revenue, according to the Office of Management and Budget. By 2004, it expects estate-tax revenue to rise to $39.2 billion, or 1.8% of total revenue.

New York Life expects its new trust services to give its 9,900 career agents a significant advantage, said William V. Zaleski, the trust company president. "It becomes much more valuable to the agent to be able to offer that service right from the get-go, and it's another arrow in the quiver of the agent as far as becoming a trusted financial adviser," he said.

Van Winkle said his clients had designated as trustee a family member, a friend, an attorney or a corporate trustee, usually banks. Many clients don't want to use banks as trustees because of other experiences they've had with them, he said.

Most of the business New York Life agent Marvin Feldman writes goes into trusts. Based in East Liverpool, Ohio, Feldman has been a member of the Million Dollar Round Table for 26 years and has achieved Top of the Table, reserved for the best producers, for 20 years. He becomes first vice president of the organization this fall.

"The problem we sometimes run into is that legal firms are busy doing other things, and it's sometimes difficult for them to prepare the documents in a timely manner," he said. "If we have a source such as New York Life Trust Co. that has document formats in place, then the trust company can provide those documents very quickly."

Occasionally, a bank will provide documents to a client for a small charge, but Feldman said one-stop shopping under the New York Life banner should make the whole process much more efficient.

"An in-company source will be more receptive to this business and more helpful in establishing it," Zaleski said. "The trust company can be hugely successful by providing a world-class service to its agents and clients."

Feldman said training agents will be key so they know how to use the resources available to them through New York Life Trust Co. He expects the company to issue specific gudielines and manuals.

Agents will not be expected to sell clients on using the trust company, but rather to introduce it as an alternative, Zaleski said. He expects that members of the Dallas-based Nautilus Group--a New York Life division made up of more than 200 agents specializing in high-net-worth cases--will be among the first to use the trust company. "What becomes exciting is that the trust relationship may ultimately provide the opportunity for an agent to solidify his relationship with clients and move along to the second and third generations," he said.

New York Life Trust Co. will provide record keeping, tax reporting, client reports and portfolio management. Zaleski said it would offer levels of service commensurate with the size of the trust. Accounts may start as low as $250,000, less than the minimum required by the largest banks. Most trusts will fall within three categories: life insurance trusts, charitable remainder trusts, and testamentary trusts, he said. (See "A Trust for Any Purposes," page 124.)

The trust company expects to develop a service for high-net-worth clients in conjunction with New York Life Asset Management, a recently formed arm of the company. The trust company will provide the delivery platform for these services, Zaleski said.

Off to a Good Start

Guardian Life Insurance Co., New York, opened its thrift, Guardian Trust Co., on June 1. At the end of last year, it was 25% over its asset target, said Frank Quinn, vice president of trust operations. By the end of this year, the trust expects to have more than $100 million in assets under management in about 200 accounts, he said.

Guardian Life has about 2,500 career field representatives and has relationships with independent brokers through its general agents. Quinn said the company's primary focus is on its career force.

When the trust was established, more than 500 Guardian agents were "actively involved" with the insurer's Advanced Planning and Professional Services Unit, which is part of the company's sales support. Since the fall of 1998, Guardian has held seminars and conferences to introduce its producers to its trust services and how to use them to implement estate plans, Quinn said.

About 15% of whole-life policies issued by the Guardian were owned by a trust, he said, and in 1998, the company helped form about 2,000 trusts.

Guardian serves as trustee most often for irrevocable life insurance trusts, rabbi trusts and trusts for inherited individual retirement accounts. IRA trusts hold the greatest share of assets, followed by revocable trusts and charitable trusts. Guardian also helps to form personal irrevocable trusts (living trusts) and testamentary trusts.

Quinn said trusts for inherited IRAs provide clients an "extraordinary opportunity" to create wealth-transfer vehicles for their beneficiaries. "Properly planned, they can be stretched out for 40 to 50 years after the death of the owner," he said. "There are good planning reasons why individuals who might not be able to manage that money should be beneficiaries. They're for wealth protection: long-term tax deferral, asset management and delivery of fiduciary services."

Before the formation of Guardian Trust, representatives would refer clients to external trust companies or might advise them to use individuals as trustees. Producers now might advise clients to appoint a family member as a co-fiduciary. "Bringing the two [trustees] together is great for the client," Quinn said.

The trust company is best designed to serve clients with at least $1 million of investable assets. These often include business owners, professionals, executives and inheritors of wealth, the traditional clientele of Guardian representatives.

No Trust for Now

Hartford Financial Services Group, Simsbury, Conn., received federal approval in January to establish The Hartford Bank. It will begin operations at midyear. Hartford Life Insurance Co. has no immediate plans, however, to use it for trust services, said Dan McDonald, vice president of individual life field sales.

"We work with a number of distributors, and many have their own trust services," he said. "We're more than pleased to work with them and do that."

Two years from now, it might be a different story, he added. "In the 26 years I've been doing this, trust departments have been getting tougher to deal with. The Hartford Bank might give us some flexibility downstream," he said.

Hartford Life has no agents of its own, but uses nearly 200 wholesalers to work with independent producers, some of whom work in banks. These producers include stockbrokers, independent broker/dealer representatives and life insurance professionals. Thus, a Salomon Smith Barney stockbroker would use a division of parent-company Citigroup as a trustee. Similarly, Morgan Stanley Dean Witter has its own trust company, McDonald said.

The clients with whom Hartford's producers work rank among the wealthiest 5% or 6% of people in the United States. Probably 60% to 70% of them create trusts as owners or beneficiaries to keep assets out of their estates, McDonald said.

Hartford Life collected about $126 million last year in first-year commissionable premiums on life insurance that was put into trusts, and the company averaged two trusts per client, McDonald said.

Hartford's most common trust is the A-B marital trust, which allows married couples to double their estate-tax exemption. Next in frequency are the irrevocable life insurance trust and the charitable trust.

In charitable trusts, the asset gifted to the charity is held in the trust, which pays interest to the donor during his or her life. The donor also receives a tax deduction for the gift. Upon the donor's death, the gift belongs to the charity. "So you disinherit your children," McDonald said. To make up for that, the donor often uses part of the income stream to purchase a life insurance contract held within an irrevocable life insurance trust. The death benefit goes to the beneficiaries. Married couples often buy second-to-die insurance for the trust, McDonald said.

Hartford representatives also help design dynasty trusts, which McDonald called "the state of the art in trusts." Dynasty trusts help clients avoid estate taxes for generations into the future.

Depending on Relationships

Principal Financial Group also cited its agents' existing relationships as the reason its thrift, Principal Bank, did not offer trust services. The bank does not even have the authority to establish trusts, said Mark West, director of advanced markets for the group. "If we wanted to, we'd have to make additional application to the [Office of Thrift Supervision]," he said. "At the time we established it in 1998, there was no priority to provide trust services."

Principal has about 1,100 career agents and a brokerage division. "Most of the time, the professional already has a relationship with a local trust department, so finding one doesn't become an issue," West said. "Often, a client would rather have a trust department outside his area for privacy reasons."

West agreed that there were advantages to offering trust services, including control of assets. "You create more ties and links to the company," he said. "That's a definite positive and something we're looking at. We would like to do something along those lines. We have no need to now, but I can see why companies are doing it."

West estimated that policies representing about 10% of Principal's life insurance premium were put into trusts. "We're comfortable with the progress we've made with small- and medium-sized businesses and with the number of cases," he said.

Principal's most commonly created trusts are rabbi trusts--in which an employer is responsible for the current taxes generated by the trust--in the business setting, followed by irrevocable life insurance trusts and revocable living trusts. Agents become involved when working in the business- or estate-planning markets. "We encourage our agents when heading down that path to get an attorney and a certified public accountant involved in the process," West said. "Through that team approach, one or all three have some relationship with a trust department. It may be the client has a strong relationship with a particular bank."
 Trust Ownership
 Households with more than $1 million in investable assets
 were more likely than other affluent households to own
 most types of trusts.
 Total Affluent: Households with
 $100,000 + income and/or net worth
 of $500,000, excluding principal
 residence
Any Trust Account 36%
Revocable Living Trust 21%
Testamentary Trust 15%
Insurance-Funded Trust 8%
Charitable Trust 5%
Other Trusts 8%
Custody Account 5%
 Wealth: Households with $1
 million+ in investible assets
Any Trust Account 59%
Revocable Living Trust 37%
Testamentary Trust 7%
Insurance-Funded Trust 17%
Charitable Trust 9%
Other Trusts 15%
Custody Account 9%
Source: Spectrem Group, 1999


A Trust for Any Purpose

A glossary of different types of trusts

* Revocable Trust: a type of trust in which the grantor maintains control over the trust assets and can revoke it. This trust is helpful in management of assets and it allows the grantor's estate to avoid probate, said Mark West, director of advanced markets for Principal Financial Group.

* Irrevocable Trust: a type of trust that cannot be revoked by the person who created it. It is used to place assets outside an estate.

* Life Insurance Trust: a type of life insurance policy in which a trust company is named the beneficiary and distributes the proceeds of the policy under terms of the trust agreement. In an Irrevocable Life Insurance Trust, the trust owns the death benefit so that it remains out of the estate of an insured.

* Charitable Remainder Trust: a trust that holds assets gifted to a charity. The charity becomes owner of the assets upon the donor's death, but the donor receives the income generated by the assets while alive and also may take an income-tax deduction. It is an excellent strategy for people with assets of $2 million to $3 million who hold stock with a low cost basis, particularly if it pays low dividends, or for those who lack diversification, said Dan McDonald, vice president of individual life sales for Hartford Life Insurance Co. The cost bases of assets placed in a trust are at current values, so the trustee can sell them without incurring capital-gains taxes. Grantors often use part of their income to pay for life insurance to preserve an inheritance for their children.

* Testamentary Trust: a trust created after the grantor's death according to the provisions of the deceased's last will and testament.

* Rabbi Trust: an irrevocable trust often used with a nonqualified deferred-compensation plan in which plan assets are subject to the claims of creditors; therefore, the employee avoids current taxes. It can be funded with mutual funds, life insurance or any other kind of asset. The advantage to a company in using life insurance is that it provides tax-deferred growth. The employer is responsible for paying any current tax generated by the trust, West said.

* A-B Marital Trust: a master trust made up of two parts--a marital, or "A," trust, and a bypass, or "B," trust. It is designed to allow each spouse to make use of the unified credit, the amount exempt from estate tax, which this year is $675,000. If a spouse simply leaves everything to the surviving spouse by making use of the unlimited marital deduction, no tax is incurred, but the couple loses the chance for each to use the unified credit. By forming the A-B Marital Trust, the first spouse to die puts $675,000 into a "B" trust naming the children or other party as beneficiary, and the total is exempt from estate tax. The surviving spouse does not have control over the "B" trust, but can receive money from it, including all of the trust's income. The rest of the deceased spouse's estate goes into the "A" trust, which belongs to the surviving spouse and is exempt from estate tax up to $675,000. Thus, the couple can shelter up to $1.35 million from estate tax.

* Dynasty Trust: a trust designed to last for many generations and maximize family wealth. Most states limit the duration of the trust to about 90 years, but some states allow the trust to last indefinitely, McDonald said. The trust takes maximum advantage of allowable exemptions on estate tax and gift tax. It also makes distributions to grandchildren and makes maximum use of the $1.03 million exemption on the generation-skipping tax, which currently is equal to the highest marginal estate tax rate of 55%. Funds usually are invested in growth stocks. Under certain circumstances, the purchase of a second-to-die life insurance policy can enhance the value of the trust. "It's state of the art in trusts," McDonald said. "It's great for people whose kids have done well and don't need the money, so they want the money to go to grandkids. We can design a trust that incurs no tax and lasts forever."

McDonald said Hartford designed a dynasty trust into which the grantors put a second-to-die life policy with a face amount of $100 million and an annual premium of $1.3 million. "Forty-five-year-old new millionaires can get excited about this stuff," he said.
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Author:Panko, Ron
Publication:Best's Review
Date:May 1, 2000
Words:3025
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