Financial Advisors Aren´t All Fiduciaries –
Why Should You Care?
A fiduciary is a person in a position of trust who obligates himself to always act in the best interest of those who trust him.
Sounds simple enough. You would think that anyone giving financial advice would be a fiduciary, but you´d be wrong. When it comes to ´financial advisors´, those who are Registered Investment Advisors (RIA´s) are fiduciaries required to do what´s best for you. ´Advisors´ who are not fiduciaries are not held to the same standard.
Who´s Who in the World of Financial Advisors
First, let´s consider who operates as a Fiduciary. Attorneys and RIA´s (like CIS and CPAIS) are examples of fiduciaries. These professionals are legally required to advise you for your benefit and interests. If they fail to act in your best interest you are entitled to take legal action against them. They must do their utmost to provide you with the best advice possible, irrespective of their own interests.
Now let´s consider those who are not fiduciaries, including brokers and insurance agents. ´Advisors´ in this group are simply bound to provide you with "suitable" recommendations and to commit no fraud. Their loyalties are to themselves, their companies or another entity.
Here´s an example of the difference. A broker can recommend that you invest in Fund A (as long as it is suitable) even though Fund B is better for you (lower turnover, lower fees and expenses). Why would he do this?
Most likely because Fund A will give him a higher commission. Alternatively, he might recommend Fund B, but use a share class of the fund that provides him with a higher commission. However, an RIA would be required to recommend the fund and the share class that is the best option for you.
It´s A Matter of Money
Know how your ´advisor´ gets paid. The three most common forms of compensation are:
Fee-only: This model minimizes conflicts of interest. Clients are charged directly for advice and/or ongoing management. No other financial reward is taken, directly or indirectly, from any other institution. Fee-only advisors sell insights and knowledge – not products.
Fee-based: This popular model is often confused with fee-only, but it is quite different. Clients are charged a fee, but the advisor may also receive compensation from commissions or discounts from financial products sponsors. Therefore, the potential for conflict of interest exists.
Commission: The ´advisor´ is paid when a client buys (or sells) a financial product. Because money is earned on each transaction, there is an incentive to encourage transactions that may not be in the client´s interest. Many commission-based ´advisors´ are well trained and have good intentions, but the inherent potential for conflict is significant.
Be aware that the same person may act in a fiduciary capacity in some instances, but in other instances may have no fiduciary responsibility. Our core philosophy at CIS is to provide objective financial planning and investment advice. That´s why we operate as a fee-only RIA – so you can be assured that our advice is always in your best interest.
back to top
Irrevocable Life Insurance Trusts (ILITs) –
Should They Be Part of Your Estate Plan?
An ILIT can be a powerful and cost-
effective part of your estate plan when structured properly.
If you have a taxable estate, or may have a taxable estate in the future, an ILIT can provide a number of benefits
including:
- Liquidity to pay estate tax for an estate with substantial illiquid assets (such as real estate);
- Reduce the size of your estate (and therefore your tax liability);
- May protect cash value of your life insurance from creditors;
- Provides control over how and when your beneficiaries receive the proceeds from your life insurance;
- Can be an attractive alternative to more complex and more costly estate planning strategies.
So, what is an ILIT?
An ILIT is a trust that is designed to hold life insurance. As the name implies, an ILIT is irrevocable. Once you´ve created it and placed your insurance policy in it, you cannot take the policy back into your own name.
Everything owned in your name at the time of death is includable in your estate for estate tax purposes, including the death benefit proceeds from your life insurance. The proceeds from an insurance policy owned by an ILIT are not. With death benefits often in the millions of dollars, and estate tax rates often approaching 50%, the benefit of an ILIT is readily apparent.
Greater Control
In addition to keeping the proceeds outside your estate, the trust structure enables you to direct how, when and why beneficiaries receive the disbursements from the trust. Minor children cannot receive the proceeds outright, so an ILIT allows you to define the terms of the trust. In some cases, you may wish to direct the timing or purpose of disbursements, even for adult beneficiaries (e.g. reaching a certain age, or completing college, etc.). This level of control is the reason some people choose to create an ILIT even if they may not have a taxable estate.
In some states, creditors can seize the cash value of a life insurance policy you own to settle a claim against you. In other states, part of all of your cash value may be protected. ILITs provide a mechanism to protect your cash value from creditors independent of where you may live, now or in the future.
While some more complex estate planning strategies can be very powerful (e.g. Charitable Lead Trusts, Grantor Retained Annuity Trusts, and other trusts), they may not be right for your situation, and they usually come at a higher cost. With an ILIT, you retain control and liquidity of your assets, ensuring that you can enjoy the benefits of your assets during your lifetime – and don´t preclude the use of other strategies if they are right for your situation.
ILITs need to be structured properly and premium payments need to be paid from the trust, not by the insured. It is critical that your trustee understand the duties required to protect the benefits of the ILIT. A professional trustee, such as a trust company, may be a good choice. For our clients, we can review your situation and consult with your estate planning attorney to determine whether an ILIT is right for you and to be sure that it is structured properly.
back to top  |
