Save Money After You Die? Trust Me

A testamentary trust is established by the will and only comes into effect upon death. It lets you give assets and property to your kids upon your death without allowing them to spend it right away.

Do you want a tax planned will with teeth?

Some lawyers say that every will should have a testamentary trust.

Five benefits of testamentary trusts:

1. Two ways to keep control beyond the grave.

A. You can have control of the timing and the amount of your inheritance that goes to your beneficiaries. What would you do with a $1 million dollar inheritance today? Now think of what you would have done with it if you got it when you turned 18. They would be two completely different concepts of spending the money, right? Well the same thing will happen to your children if you die before they turn 18. They will do as most teenagers will – wait out the clock until their 18th birthday and then host fantastic parties.

The trick to passing money to your children is that you want to give them enough to do something with their lives, but not enough for them to do nothing with their lives. This trust can do this because you can designate they get 25 percent when they reach 25 years old, 25 percent at 30 and the rest at 35, or however you want to split it.

B. You choose who manages the money. I recommend you name someone who is financially responsible. A caring family member may love the beneficiaries but have no experience or concept of managing money.

2. Protecting your assets from the claims of your beneficiaries’ creditors or marital property claims from their spouse.

3. The trustee can be given the ability to exercise flexibility on disbursing the money to your beneficiaries. This is a good provision to have if the beneficiaries lack responsibility or the capacity to manage their own money.

4. Tax savings if the beneficiaries have little or no outside income. (If the adult children are spending a lot of money on their children’s extra-curricular activities, or tuition, and these adult children get the inheritance, the money will be taxed in their hands at their high tax bracket). Instead, if the grandparents set a trust up for the grandchildren, then their tuition and extracurricular activities can be paid from the trust. This is a great strategy because the income from the trust can be paid to the beneficiaries and taxed at their lower rates.

5. Intergenerational wealth transfer. You can ensure that your spouse (from your first or subsequent marriage) gets the income from your estate once you die to support them until they pass on. Then, in the trust, you can elect to have the assets of the estate be kept for your children from that marriage or a previous marriage. Keep in mind if you have a second spouse and you don’t put any conditions on the inheritance, and you die first, they can transfer all the money upon their death to whomever they want (not necessarily your children).

Tip: Make sure the assets that you want to be in the trust end up going through your estate. Don’t try to avoid probate (EAT) here, otherwise you will undo the work of setting up the testamentary trust if there are no assets or money that go into it. (Any named beneficiary designations you appoint to your spouse or kids for your registered retirement savings plan, tax free savings account or life insurance will go straight to the beneficiary and completely outside the trust.)

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