How does life insurance benefit a Testamentary Trust?

A testamentary trust is established using a will when someone dies, including the following types which direct a named trustee to manage and distribute assets and income to named beneficiaries of the trust.

You can designate the number of years it will survive, within permissible, legal limits. The trust becomes effective at the time the will is probated. The assets undergo the probate process and are therefore, exposed to creditors’ claims. Note: If your intent is to avoid probate, a living trust would be a more suitable alternative especially adapting the use of life insurance. However the potentially lower marginal tax rates allowed with the testamentary trust, needs to be weighed against potentially higher future income tax payable. When using a testamentary trust (versus an inter vivos trust) make sure your beneficiaries are properly specified to work according to your trust directives. A qualified tax advisor should assist you as you make these decisions.

Individuals commonly choose between two types of trusts: family and spousal.

Family trusts
 

Minor Trust This trust protects the interests of underage children.

Protective Trust This trust protects any family member with special needs such as:

• Safeguards adult children’s assets from creditors or divorce settlements.

• Manages funds for spendthrift adult children.

• Minimizes disclosure of small business assets that could be susceptible to lawsuits or creditors.

Spousal trusts are established to provide your spouse with funds.

• Protects the testator’s children’s assets should your spouse remarry or can assure the inheritance of children from a previous marriage.

• Reduces income tax through income splitting.

How are trusts funded?

If an estate will have significant capital gains tax due and/or debts, consider using life insurance to cover all liabilities. You can also increase the death benefit to pay off business agreement liabilities (if any) and provide specific trusts with the necessary cash.

 

What powers do you assign to an executor?

Consider what is involved before naming or agreeing to act as an executor. 

• An executor carries out the instructions in your will. Co-executors can share the task.
• Jurisdictional laws define what the executor must do, whether they are a friend, relative, professional, or a trust company—however, the will can specify even more extensive powers.
• The executor may have to deal with some or all of the following at an emotional time: a funeral home, beneficiaries, past or ongoing taxes, insurance and investment companies, government and business pension departments, real estate agents, lawyers, accountants, appraisers, stock brokers, and business partners.
• They may also be empowered to convert the estate to cash or divide assets equally among beneficiaries. They can also make payments to the parent/guardian of a beneficiary in most cases.
• The executor (especially if inexperienced in legal or financial matters) should know how complex the estate is before agreeing to the task. If necessary, appoint a co-executor who is a legal and accounting professional.
• Have a clear and objective idea of what will be involved before asking someone to be your executor and agreeing to act as one.

Discuss the parameters of an executor with your lawyer, before enabling one, or taking on the responsibility if given or offered to you.

How does a business create a Succession Plan?

Succession planning allows you to transfer your wealth creating potential.

 

Many who own family businesses, will move into retirement over the next two decades. A delicate process referred to as “succession” or “business continuity” planning can lead to relinquishing leadership roles while transferring their businesses to the next generation.

By developing a succession strategy you can fairly distribute business assets; transfer the power and authority associated with leadership from the senior to next generation; and cultivate family harmony. The successor then becomes the new steward of the family legacy.

An excellent plan will establish the best possible tax planning to limit liabilities that can occur.