Insurers, Pension Companies and Fund Houses as Trust Providers?

This is the 4th installment on the various people in the marketplace vying for your trust business. (Go back and look for write ups on lawyers, accountants & company secretaries, banks and independent trustees). This part focuses on insurers, insurance agents/brokers and pension/retirement scheme providers an Fund/Asset Managers.

For pension providers, they are already trustees. However, the trusteeship of pensions or employee benefit schemes is slightly different than personal trusts. Pensions usually have restricted asset classes and investments and very large number of silent beneficiaries. Private trust, typically have a much wider range of assets from bankables to real estate including homes, private operating/holding companies, art and jewelry and sometimes aircraft and yachts. Pension trust administration is highly regulated (at least onshore it is) more transactional and valuation oriented than dealing with tax, succession and other family issues. Taxation of pension benefits is usually straight forward. Taxation of private trust income and distributions is usually anything but straight forward. Pension distributions, additions and removals are very mechanical as pension vesting is usually quite contractual and non-discretionary. Almost everything with private trusts is discretionary. Just like trustees of mutual funds/unit trusts, asset securitization trusts, REITs, etc., the general trust theory is there. In practice there is little similarity with personal trusts. Hang gliding and powered flight are 2 different things despite same aeronautical principles. However, the background and infrastructure of large pension and corporate trustee providers make them well suited to leap into private trusts and some do. I would say you can get sound service and advice but I would say you are likely to get better service and better advice from those who do private trusts as a main business and not those who do it as a side business. Why ask Land Rover to build you a sports car when Ferrari specialises in them? I have no doubt if you have the money that Land Rover would entertain you and do a reasonably good job but is it worth the time and trouble?

Beware of those that try to use pensions as a tax planning tool. There is a lot of interesting (and questionable) planning that involves thinly disguised pension schemes as tax-mitigating investment holding vehicles. If it doesn't fly onshore, meaning it must be set up outside your country of residence, then you may want to avoid the risk.

For insurers, trust business used to pretty much mean pensions. Some of the large insurers had pension trust businesses for many years. So they had an infrastructure. They saw that personal life insurance and K&R insurance playing a big part in Asian (and international) wealth planning. They now had a workforce that was accustomed to dealing with the HNWI. It shouldn't be a big surprise that the insurers want a bigger slice of the wealth pie.

Some people expressed shock that insurers like AIG were caught up in the GEC. Well it shouldn't, insurers are some of the biggest gamblers, ah...investors in market. They want money to play with. It is a more recent phenomenon that the insurers had ventured into private wealth management and some have even ventured into private banking and portfolio management. Now we are seeing many of them attempt personal trust services. All because they want more money to play with.

Some insurers have business partnerships with external trust companies to provide trust services. In general, I have nothing against a referral program and these insurers as they aren't "selling" or planning the trust part.

Unfortunately, some go about all by themselves. My limited experience with these insurer trust companies is that I haven't come across any trust heavy-weights yet, just surprisingly well trained brochure-spewing Ken and Barbie dolls. They don't know the real answer, they just know where to find the relevant Q&A section in the brochure/sales manual. I have seen their glossy brochures and 3-page trust deeds. I would bet they have had high-priced external help in setting up documentation and procedure manuals. I would bet that they can offer a highly efficient operation. A simple, template product for mass market distribution. A simple trust, with little or no administration during its duration with a simple distribution at the end. Doesn't take much skill. Doesn't offer much benefit. You don't take on much fiduciary risk. It doesn't cost much to roll out. It's small unit revenue, nice easy revenue if you can build up a mass. A 10-20% penetration rate into your existing client base and your a rich man.

In many ways, they are like the retail/consumer banks, selling a trust for succession over a bank account and probate avoidance. What is going on is they are taking certain features of a trust for the purpose enhancing the appeal of their insurance product. You get a so-called "insurance trust" which is a trust purely for holding insurance policy. One-trick pony. This is like buying one of those strange kitchen utensils you find on late night TV paid advertisements. You have some specialist tool just for peeling oranges. Cool! Only $2.99, great! But do you really need it? Is there real value added? You could do a lot more with a (little more expensive and useful) stainless steel paring knife. In life, things are complex and inter-related. An insurance trust may be satisfactory if all your interested in is that insurance policy. What about your other insurance policies? Will your insurer-trustee let you put those in their trust too? I doubt it? What about your other valuables? Nope...only our insurance policies please. Are you even dealing with a "regulated" insurance policy?? If the insurance company is selling you a policy, that policy has to be approved by some government agency as being suitable for the local market (even if the policy is written under a foreign law like Bermuda or Ireland). With many of these "wealth planning" insurance products, they are not approved by the regulators. They are often "private placement" products which due to their monetary value, risk or sophistication, are not suitable for the general public but can only be sold to sophisticated investors/parties or outside your country. Guess who is usually considered a sophisticated investor? Guess who is often set up outside your country of residence? The trustee of your trust silly. See how nicely they have manage to circumvent....eh navigate, past local regulations and also pad their profit? Instead of letting the tail wag the dog, go to a good trust adviser and see if there's a better solution.

The problem is you now have a force of several hundred unqualified agents out there mass marketing trusts. There are bound to be some mis-selling, errors in form, screening of clients, etc.. Fortunately, they for the most part are just creating simple, essentially bare trusts, to hold their insurance policies and little else. I would be a much more apprehensive if they started venturing into true irrevocable discretionary trusts with assets other than an insurance policy. Still, there are many issues with trust administration that even bare trustees need to get right and I don't know whether the insurer trust administrators are up to the task.

Unfortunately for you, that simple trust may also ruin the chance your beneficiaries of getting all the proceeds. You may be put in worse position by having the trust than not. Adding a layer to the distribution of insurance proceeds, which is what these trusts do, has consequences. Some rules surrounding the legal and tax attributes of personal life insurance no longer apply or change if the policy is held by a trust. Did you take tax or legal advice? God no.....the adviser would have cost more than the $500 trust itself. Do you know what bearing divesting (if indeed you even did divest) part of your wealth has in relation to your spouse, heirs or creditors? Maybe you should. You have a trust that is not suited for tax planning. Fine, you say, I didn't need tax planning.....what they don't tell you is sometimes tax creeps up on you. If you are someone with "pre-existing condition" like foreign residency or citizenship/domicile/marriage, or your intended beneficiaries do, take advice. If you would like to achieve more than a redirected distribution of insurance proceeds, seek advice. How does this trust affect the rest of your wealth and estate planning? Seek advice.

Bear in mind that there are some specialist brokers/insurers out there, catering to the insurance needs of the HNWIs and UHNWIs that have become very well versed in using trusts in conjunction with insurance. These are usually the ones on the front line with respect to million dollar Universal Life policies, tax planning/compliant policies for the HWI and UHWI. I'm not talking about them as they usually do not provide trust services nor advisory. But they may try to get you to sign up for a trust. They do so from experience in working with the tax and trust lawyers/accountants. Some of them were tax and trust people. If they have general advice, usually you should take it and go with them to see a trust adviser.

The last group are what I refer to as Fund Houses and Asset Managers, traditionally serving institutional clients. These days it's hard to classify what the big financial houses do. For instance, most of them like say State Street Bank & Trust mainly serves institutional clients but they have a private wealth division. Some of them serve their key private clients and offer private trust services. The main distinction, if any, is these are usually a very big clients, US$10M or more in funds that they put a personal trust on top of. Admittedly I have only seen a few of their trusts but from what I've seen, they are competent and utilise top-notch external counsel. If you're big enough to be dealing with these players then you can afford your own trust counsel and so there's nothing I can add. Just beware of the smaller players getting into the market.