February 3rd 2012
Should You “Trust” Your Children?
When it comes to leaving money to the next generation, you may want to consider whether or not to use a trust. While some people feel that trusts are expensive and complicated, they have significant tax advantages that shouldn’t be ignored. They can also work to protect the assets themselves from possible misuse by the beneficiaries. Let’s take a look at how this could work.
Gerry and Jane have two adult children, Bruce and Judy. Judy is a successful dentist with three children who earns over $150,000 per year from her practice. Bruce, on the other hand, is a part-time musician who lives hand to mouth. While Judy has always managed her money carefully, and invested well, Bruce’s interests lie in other areas. He has never been one to save and invest, preferring to live for today and let tomorrow take care of itself.
Gerry and Jane’s estate plan calls for all assets to go first to the surviving spouse, and then to be divided equally between Bruce and Judy. However, rather than leaving assets directly to either child, there could be significant advantages to leaving the assets in trust.
Income Splitting
First of all, Judy’s income takes her into the top marginal tax bracket. Any income from the investment of her inheritance will automatically be taxed at the top rate. If her share was paid into a testamentary trust created by her parents’ wills, the income could be taxed in the trust, at the usual graduated rates that apply to us all. Judy could still have access to the funds at any time, but she would enjoy significant tax savings.
Generation Skipping
On the other hand, Gerry and Jane might feel that Judy is doing quite well for herself, and doesn’t really need any extra money. They might prefer to set up a testamentary trust for Judy’s children, providing them with the funds they need for a start in life, whether paying for education, buying a first home, or starting a business.
Spendthrift Trust
For Bruce, a trust is useful for other reasons. While tax rates are not an issue, Gerry and Jane are concerned about his ability to manage an inheritance. While they would like to see the money invested wisely for Bruce’s future, they fear he may use up this “windfall” in short order. By creating a testamentary trust for Bruce, Gerry and Jane name a trustee to manage the funds and pay income and/or capital to Bruce according to the guidelines in the trust document.
While using a testamentary trust has many advantages, there are costs to consider as well. We would be happy to discuss the details with you at your convenience.
Other articles you might enjoy:
"Should I have annuities in my portfolio?" November 2011"A welcome new service from CRA" November 2011
"Looking for an alternative to mutual funds?"
"Is a reverse mortgage right for you?"
"Protecting your income"
