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Whom to trust your child’s future with?

Mint 3/9/10, Harshada Karnik : harshada.k@livemint.com

The thought of leaving your child alone is scary. Leave behind a cushion for her in case you and your spouse die!

Stepping out of the house every morning for working parents living in nuclear families is distressing. Leaving your child with a babysitter or at a day care centre and not knowing what exactly is happening in your absence is not easy. Yet you try to make up by ensuring that even during your absence, your child gets the best—you choose the best babysitter or a day care centre available and provide for everything that he may need while you are at office.

But what if this absence were to become permanent? Your first thought would be that your spouse would be around to take care. But what if worse comes to worst and both of you meet with a fatal accident and are not able to return home, ever? Who would take care of your child then and provide for his daily needs?

While the emotional scars on your child may take a lifetime to heal, you can at least secure his future financially. To do this, we recommend you plan your succession by creating a trust or providing for its creation in your will.

A will is susceptible to misuse as your minor child wouldn’t be in a position to use the inheritance in a way that is best for her. Even a well meaning guardian may not be able to do justice to your plans. On the other hand, in a trust, you can specify exactly how, in what proportion and when your wealth goes to your child and serves what purpose.

“Trusts are gradually gaining popularity; 70% of our clients have opted to create one. It is still more popular among high networth individuals but the upper middle class is also fast catching up,” says Sandeep Nerlekar, managing director and chief executive officer, Warmond Trustees and Executors Pvt. Ltd, a trusteeship company that specializes in succession planning.

Why does creating a trust make sense?

A trust deed can be worded exactly how you wish it to be. Hence, it enables you to secure the future of your child and give him a basic handbook to go back to in case of problems. The children can be brought up more or less in the same way you would have liked them to grow up.

It’s best to involve an unbiased third party to take care of the trust. “People are getting more comfortable with an independent professional or institutional trustee to secure the financial future of their children as they can benefit from his professionalism in managing finances,” says Adrish Ghosh, head (wealth advisory), Barclays Wealth India, the wealth management division of Barclays Bank Plc.

How to create a trust?

You can buy a stamp paper and get your trust deed printed on it. Alternatively, you can first get your trust deed printed on a legal paper and then go to any authorized bank to get the deed stamped. It is not mandatory to register the trust in all states. However, if the assets mentioned in the trust include an immoveable property, then you would be required to register it at the sub-registrar’s office in most states. It is advisable to have at least two trustees, but if you appoint a professional trust company, then that one institution suffices.

Costs: The cost of maintaining a trust depends on the scope of the work, asset size and the complexity of the assets. If the trustees are your own relatives and are doing the work out of goodwill, they may not charge you anything. However, a professional may charge you an annual fee of anything between Rs200 per lakh and Rs1,000 per lakh of assets.

“You can create a living trust with an amount as small as Rs10,000 and transfer all your assets to it on your death through your will. If a couple leads a hand-to-mouth existence, then creating a trust does not make sense. However, I would say that if the couple’s total assets add up to Rs50 lakh or more, it is a good idea to create a trust or provide for the creation of one in your will,” says Nerlekar.

Types of trust: There is a testamentary trust and a living trust. Testamentary trust is created though a will and comes into existence on the death of the testator, one who writes the will. In case of a living trust, you may set aside a small amount as part of the trust capital or regularly transfer money to it. “Creating a living trust eliminates the necessity for a probate (the process by which the court establishes the authenticity of a will), which a testamentary trust may have to undergo. The probate could take a minimum of five-six months since our courts are overburdened,” says Anju Gandhy, partner, SN Gupta and Co., a law firm.

What to budget for?

The typical expenses you will have to account for are day-to-day expenses that the guardian will incur to raise your child, medical expenses and education and marriage expenses.

A regular income flow to the guardian for the upbringing of the child and the maintenance fees and expenses of the trust are also to be budgeted for.

“I usually advise my clients to set aside an adequate and fixed amount for each child for specific big-ticket expenses. For instance, undergraduate studies, postgraduate studies and marriage. Since education is on the agenda for most parents, they allow the trustees to let the child dip into the marriage fund for education, if need be,” says Ranjit Dani, principal planner, Think Consultants, a financial planning firm.

How do you divide the money?

If you have two or more children, making equitable distribution is the best you can do since you would not be around to take decisions and justify them. “The needs and capabilities of the children are likely to be different and, hence, their financial requirements will differ. However, equality in distribution and vesting of the trust are generally widely accepted,” says Ghosh.

“It is very essential to ensure that the funds allocated are not misused or abused and, hence, you need some amount of rigidity in the trust deed. So, though it may not be the best idea, most would prefer to divide the money and assets equally between two children and not allow them to dip into each other’s resources,” says Dani.

Releasing the money

Since the trust is created to ensure that your children have the money when they need it, the funds would have to be released in instalments. However, once the children become self-sufficient and are mature enough to handle the money, the remaining assets can be distributed between them.

“There are two models that can be used. You could release the children’s respective shares to them as and when they reach the stipulated age (usually 21-25 years) or release the funds to them when the youngest child reaches the stipulated age. The elder ones can continue to receive a regular allowance till then,” says Ghosh.

Passing on your property

Since your children need to be raised by someone, they may need to shift to the guardian’s home, while yours lies vacant. Make a provision in the trust to ensure that the trustees maintain the property till it can be passed on to your children.

“The trust should preserve the property’s value but may or may not lease it out depending on the testator’s desire. Real estate is a really good investment because it has a higher probability of preserving the value of the asset and can also provide a steady flow of income. Instead of liquidating the assets if you keep a portion of your wealth locked in real estate, it is more likely to safeguard your investment,” says Ghosh.

However you may consider including a clause that will allow the trustees to sell and liquidate your property in case the other funds you have left behind are insufficient for the upbringing of your children.

Investing the assets

Just leaving behind your assets is not enough. To ensure that your children are taken care of in the future, it is necessary that your wealth grows to tide over inflation in the long term. Therefore, the need to invest.

But before the assets are invested, it is crucial to account and consolidate all the cash flows and assets, including insurance proceeds, unpaid dues from employers or businesses. “Often people are lazy and don’t mention all their bank lockers and savings accounts properly. It is very essential that all these proceeds be collected and consolidated,” says Dani.

If your child is young and you want your money to grow by the time he reaches college or plans to get married, your money would have to be invested in equities early on.

“Logic would tell you that don’t take a risk and park the assets in a safe avenue. However, rationally that may not be the best thing to do. Say, if the child is five years old, then the funds you want to set aside for his marriage will be best stashed away in an equity instrument. So, the planning of finances will differ from case to case,” says Dani.

New Ulip norms may throw 1.2 million agents out of work

Mint 3/9/10 Anirudh Laskar & N. Sundaresha Subramanian

anirudh.l@livemint.com

Reduction in charges to benefit policyholders, but will bring down agent commissions from 15-17% to 7-9%

Nearly three-fourths of the 1.6 million agents working for private life insurers are set to go out of business, as insurers are taking steps to cut costs in the wake of a dramatic reduction in charges of unit-linked insurance policies, or Ulips, by the insurance regulator. The new norms, which may push 1.2 million agents out of work, took effect from 1 September.

Ulips, a hybrid product that combines insurance and equity investment, account for at least 80% of new business premiums for life insurers.

The size of the agency channel, which sells policies of 23 life insurers, has grown from 900,000 to about three million in a decade. Until recently, agents were aggressively pushing sales of Ulips, earning commissions of up to 40%.

Life Insurance Corp. of India, or LIC, the state-run insurance behemoth, alone manages at least 1.3 million agents. There are about 310 million policies in force, including traditional life insurance policies.

The insurance regulator has capped various charges including surrender charges. Till 31 August, companies were able to levy up to 100% as surrender charges from a customer if a policy was discontinued.

The regulator has also ordered insurers to offer a minimum guaranteed return of 4.5% on the fund value in linked pension plans. Earlier, there was no such norm and the value of the funds invested entirely depended on the yield of the instruments where the premium was allocated.

The new norms will benefit policyholders but will bring down average agent commissions in Ulips from 15-17% to 7-9%.

Though the new rules will benefit policyholders, reduce first-year agent commissions and help curb rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain Ulip sales.

“With the change in distribution norms, 75% of the agents will earn less than Rs10,000 a month. They will hardly bring any meaningful business to us. They are most likely to either quit on their own or we will ask them to leave,” said the chief executive of a large private sector life insurer who did not want to be identified. Currently, such agents earn nearly Rs20,000 a month.

S.B. Mathur, secretary general, Life Insurance Council, the representative body of Indian life insurers, went one step ahead: “About 75% of the agents are not productive. They just sell one or two policies and go away. What is the use of having them?”

LIC may not need to resort to cost-cutting measures due to its highly profitable business, but private sector insurers are planning drastic cost-cutting measures to sustain their businesses in the new regime. Cutting the agency channel is only one of several cost-cutting measures. The firms also plan to cross-sell products through branches of associate companies instead of opening new branches, cut commission of agents retained, and redesign new products with variable premium.

The companies are also focusing on alternative distribution channels such as subancassurance, where the expenses are lower. According to industry estimates, the cost of sales through bank branches or bancassurance can be as low as 20% of the value of the policies sold.

Though a bulk of the sales for some private players comes from bancassurance, overall, nearly 80% of policy sales in the life industry comes from agency channels.

LIC recorded a surplus of Rs23,500 crore in fiscal 2009-10 but most private life insurers continue to be in the red.

According to a recent study of consultancy firm McKinsey, existing distribution channels are almost entirely focused on Ulips. Nearly 85% of new business premium comes from sales of Ulips but the cost of sales through agency channels is very high—between 50% and 100%.

The study said the cost should be brought down to 25-30%. It also revealed that nearly 60% of the agents work part-time.

To save costs, private players are also focusing on training facilities to improve agents’ productivity. Some bank-owned life insurers are planning to sell insurance policies through the branches of their mutual fund subsidiaries.

LIC is setting up a separate wing for training agents. “Once this happens, agents can be trained on focused marketing strategies, where they will work on a select seven-eight products at a given time rather than going to the customer with 50 different products,” said Nilesh Sathe, executive director-marketing, at LIC.

N.C. Upase, a member of the chairman’s club of agents, LIC, said private sector agents are the worst affected. “Earlier, they used to be earning 25-40% commission. Now they won’t get more than 7-8%. This means their monthly income would come down by 60-70%.”

The chairman’s club of LIC is an exclusive group of agents who sell policies worth more than Rs1 crore in a year and have at least 550 life insurance policies in force for three consecutive years.

Upase said LIC agents may not face much trouble since they were earning much less, about 7.5%. “There are no major changes in LIC policies, except that the allocation charges are now distributed over five years. Agents would continue to get same commission,” he added.

Consultants are convinced agency sizes have to be trimmed. “The insurance industry cannot continue with the current costs. It needs to build a focused agency force. Companies must bring down the number by 30-50% at least, depending on their individual cost structures,” said Joydeep Sengupta, managing partner, McKinsey and Co. Singapore Ltd. Though the life insurance industry has grown to its current levels on the back of agency channels, this distribution channel is the most expensive of all other channels.

“Due to higher-than-expected expenses the companies have failed to attain a breakeven so far. The persistency ratio too is as low as 10% in some cases. This has to be improved,” J. Hari Narayan, chairman, Insurance Regulatory and Development Authority, or Irda, said at a conference in Mumbai on Wednesday.

The regulator has so far cleared 51 of 68 new Ulips filed by insurers. There were 230 Ulips in the market till August.

India’s life insurance industry has grown some eightfold in the past decade, collecting a total premium income of Rs2.61 trillion in 2009-10, or which nearly Rs1.1 trillion came from Ulips. At least 310 million life policies are in force now.

Stock Call Given…

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3:57 PM – Buy Noida Toll Bridge with 12-18 month target of Rs 50, says Vivek Karwa of Vridhi on NDTV Profit.

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