Testamentary Trust

By David Adimora

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When leaving a legacy to your heirs, consider how they'll receive their inheritance, and not just how much.
Are you comfortable with them receiving a large sum all at one time with no conditions attached? Will they be mature enough to handle the proceeds? Will all of the intended beneficiaries receive their inheritance, if you are in a blended family? These issues can generally be addressed with a testamentary trust.

Briefly, here is how a testamentary trust works:

The trust is established in your last will and testament. It does not come into existence until the date of your death.

The trust is a separate taxpayer, so it will file its own tax return and, therefore, the income may be taxed at a lower rate than if received by the beneficiary directly.

You must appoint a trustee, who may (but need not be) the executor of your estate, and who can either be a trusted individual, or perhaps even a corporate trustee.

The terms of the trust can stipulate when your beneficiaries will receive their inheritance, or it can give the trustees complete discretion as to when to payout the funds.

Here are a few examples of when you might consider using a testamentary trust:

If you have minor children (or grandchildren) and you do not want them to receive their entire inheritance at age 18 or 19. If there are no conditions placed on their inheritance, they will be entitled to the funds once they attain the age of majority.

If you are in a second marriage, and you want to leave your assets to your second spouse, so he or she can use them for so long as they are alive. Upon your spouse's death, the assets will revert to your children from a previous marriage and not go to the children or heirs of your second spouse. (If you do not put any conditions on the inheritance you leave to your second spouse, they will be free to leave the assets to whomever they choose, which may or may not include your children.)

If you have a child who qualifies for social assistance due to a disability, it may be better to leave the monies for them held in trust so the receipt of these proceeds does not jeopardize their ability to receive social assistance. The rules regarding this type of planning differ between the jurisdictions, so be sure to consult a professional financial planner to review your options.

If your heirs are in a high-income tax bracket, they may want to minimize tax. (If they receive the inheritance directly, they will have to pay tax on the income at their high marginal rate.) When the proceeds are instead left to them in trust, the amount of tax paid on the income can be minimized.

The uses of testamentary trusts are varied, and in some cases, the issues can be complicated. Be sure to speak with your financial planner to ensure you are leaving your inheritance in a way that is designed to achieve your desired objectives and minimize tax at the same time.

This article is for information only. It is not intended to provide personalized tax, legal or investment advice. For your specific situation, consult your financial planner.


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