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.