You may have already decided how your children will benefit from your legacy. If so, you?ve likely specified in your will how much each will receive. But what if your heirs were to get all that money in a lump sum with no conditions attached when they are still young? Would they be mature enough to handle it prudently? And what if your intended beneficiaries are part of a blended family? Are you certain that each will receive their inheritance according to your wishes?
These are issues that can usually be addressed with a testamentary trust ? and even if you?re not concerned about leaving your legacy directly to your heirs, a testamentary trust offers the added benefit of creating tax savings for your spouse, or even the next generation. Here?s how a testamentary trust works:
? The trust is established in your last will and testament and does not come into effect until the date of your death.
?The trust is a separate taxpayer, so it will file its own tax return and therefore, the income earned by the trust assets may be taxed at a lower rate than if the beneficiary received it directly.
?You must appoint a trustee of the trust. This can be your Personal Representative (also known as an executor or liquidator in Quebec ), another trusted individual or even a corporate trustee.
?Within the trust, you can set out terms that stipulate when your beneficiaries are to receive their inheritance, or give the trustees complete discretion about when to do so.
You should consider using a testamentary trust if:
?You have minor children and do not want them to receive their entire inheritance immediately once they reach the age of majority. Without a testamentary trust that allows you to restrict when their bequest is to be paid out, they will be entitled to all of their inheritance when they reach age 18 or 19 depending upon the province of residence.
·You are in a second marriage. If you leave your assets to your current spouse, he or she will be free to leave those assets to his or her own heirs, which may not include your children. Through a testamentary trust, you can specify that, upon your spouse?s death, your assets will revert back to your children from a previous marriage and will not go to your spouse or their heirs.
?You have a child who qualifies for social assistance due to a disability. It may be better to leave money to them through a trust so that the receipt of these proceeds does not jeopardize their ability to receive social assistance (Please note that the rules for this type of planning differ between jurisdictions, so you should consult a financial planning professional).
A testamentary trust can be a useful estate strategy, but the issues can be complicated. Be sure to speak with a professional financial advisor and a lawyer to ensure your legacy is passed on to your heirs while attracting the least amount of taxes.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.