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Life Insurance: Financial Glue For International Families

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Our world has figuratively shrunk in size. The long distances between places no longer limit our ability to see and experience our planet. International travel, the Internet, the growth of mass communications and cross-country environmental concerns all have contributed to this shrinking effect.

What does this mean for families? These trends have forced many families to adopt a global perspective. Many people are experiencing more of the world than just their home country. They travel internationally for business, education and pleasure. A new kind of family is developing: the international family.

Families face new pressures and problems when their members live abroad for business, education or pleasure. Financial losses can result and family bonds can be weakened. If a family member marries and settles in a foreign country, asset protection, child custody and visitation rights can become problematic if the marriage is troubled or terminates. How can international families protect themselves from these problems?

Protection through a family safety net

The best protection comes from seeing the potential problems in advance and making concrete plans to avoid them. Family leaders may find that it makes sense to create “a financial safety net.” This strategy sets aside family assets in an account that will be available to help family members who suffer financial emergencies. It can act as a flexible family “slush fund.”

Generation skipping transfer trust

In the U.S., we have a vehicle that can meet all of these objectives and provide a long-term structure for this safety net. A GST trust is a fund managed by a trustee who has the discretion to make distributions to family members who face financial emergencies. The GST trust should be established in a state with laws that permit the trust to last for multiple generations and, perhaps, forever.

Since it is impossible to know in advance who will need the safety net, how much will be needed, or when it will be needed, the trust must be flexible to protect the interests of all family members.

Life insurance can fuel the GST trust

The trust is only as good as the funds it has, and the trustee must manage those funds carefully. What assets should the trustee use to efficiently retain and accumulate funds in the trust so they are liquid, growth-oriented and tax-efficient, and can be accessed quickly when a beneficiary has an urgent need? In the American tax system, cash value life insurance meets these criteria.

The trustee can purchase a life insurance policy on one or more of the senior family members (parents or grandparents). One parent/grandparent should establish the trust and provide the funds needed to purchase the life insurance policy. The other (non-grantor) spouse can be a beneficiary of the trust and may be entitled to receive distributions at the discretion of the trustees in the event of a financial emergency.

While the insured is alive, the trustee has the discretion to use policy cash values or other trust assets to make distributions to family members in need. At the insured’s death, the trustee will receive the income tax-free death benefits; they can be held and invested for later distributions to family members when future financial emergencies arise.

Life insurance can be the key. When properly used in the trust, the death benefits can be the financial glue that holds everything together and creates tax-favored funds that can be distributed for years to come.

This can be particularly helpful if family members living abroad have financial problems. The funds in the trust may help them weather a financial crisis. The trust distributions may be the financial bridge that gets them through their time of trial and helps them maintain their financial stability.

The GST as an “incentive” trust

A GST trust funded with life insurance may be able to do more than provide a safety net during difficult financial times. It can also act as an incentive trust that guides the behavior and life choices of future generations of family members. The trust does this by giving them financial incentives to live in a certain way or to make life choices the creator of the trust thinks will be in their long-term best interests.

To provide incentives for positive life choices, the trust can include provisions that establish standards and the trustee can be directed to make distributions to family members who satisfy them. The standards can be behaviors or actions the grantor considers to be important to living a productive, useful life. In this way, the grantor can reward family members for positive action and guide children and grandchildren toward behaviors that the grantor believes will make their lives better.

The potential for the trust to be more than a financial safety net can be a valuable selling tool. Adding incentive features can make it a dual-purpose trust that addresses both the hopes and the fears family elders have for younger family members. Incentives can be customized to the trust; here are some commonly used:

? The public service incentive. A grantor may believe it is important for family members to consider public service-oriented employment. The trust can mitigate or eliminate the resulting financial sacrifice–positions in non-profit organizations and government often pay less than comparable positions in the private sector–by making distributions to supplement the salary of a family member who chooses to work in the non-profit sector or in government.

? The achievement bonus. The grantor can give family members incentives to achieve specific goals by directing the trustee to make a distribution when a milestone is reached. Such milestones can include graduation from college or graduate school, earning a professional license, buying a home, etc.

? The happy marriage incentive. A grantor may want to encourage family members to marry and stay married. If so, the trust can have a provision that pays a bonus upon the date of a marriage and/or at specified anniversaries (e.g., fifth, 10th, 15th, 20th, 25th anniversaries).

? The grandchild incentive. Some grantors may want grandchildren or even great grandchildren. To give children a financial incentive to produce grandchildren, the trust can make a single payment or a series of payments to children who have children of their own.

? The family reunion fund. A unique incentive the trust can offer is to pay all or part of the cost of regular family get-togethers. This can be particularly important when one or more family members live abroad and don’t get many opportunities to see the rest of the family face-to-face.

The financial glue

Life insurance can help fund the incentives. If the trustee purchases a cash value life insurance policy, withdrawals or loans of policy values can provide funds to pay for the incentive distributions. After the insured dies, the trustee receives the income tax-free death benefits and is in an even stronger position to help family members weather financial emergencies and reward positive choices with incentive distributions. Life insurance can be the financial glue that keeps the family connected and moving in the right direction.