While there are many types of trusts, they share a common purpose: to help protect your beneficiaries and effectively transfer property. Everyone has specific reasons for setting up a trust. Here are some of the more common ones.
Passing along assets to minors. Many people like the idea of gifting to children or grandchildren, but what happens if they are too young to handle money? Can these beneficiaries handle the resulting financial responsibility? With a trust, you can keep assets protected until the beneficiaries reach a certain age, and then you can either transfer all of the assets to them or have the trustee follow a prescribed schedule so the beneficiaries receive assets gradually – perhaps to fund education or to purchase a home.
During the lifetime of the trust, any income earned on the trust’s property could be made available to the beneficiaries. In the case of younger people or those who may not be adept at handling finances, a spendthrift trust may be appropriate (see section below, “Ensure prudent management of the trust”).
Children from a previous marriage. Passing along assets can be challenging when there is a blended family. You may want to ensure your current spouse is taken care of, but not at the expense of a child (or children) from your previous marriage. With a trust, your assets can be made available to your spouse and any income earned on them paid to your spouse during his or her lifetime. The trust can ensure that, upon the passing of your spouse, those assets will be transferred to your children.
Need to ensure proper asset management. If your spouse or other beneficiaries lack the ability or interest to manage the assets you will be leaving, you can enlist a trustee to oversee the asset management on your spouse’s or other beneficiaries’ behalf.
Disabled or special-needs child. Your trustee ensures that funds are available to provide your disabled or special-needs child with proper care, drawing from the trust as needed to pay for anything that allows your child to maintain a satisfactory quality of life. The trustee should also endeavour to protect your child’s eligibility for disability benefits. If you simply leave an inheritance to your child, the assets could disqualify her or him from receiving disability benefits.
A Henson trust is a flexible type of trust designed specifically to benefit people with disabilities.1 It seeks to protect the assets of a trust from being considered to belong to a person with a disability, thereby protecting the beneficiary’s eligibility to collect government benefits and entitlements.
Support for your spouse. A testamentary spousal trust can provide support to the surviving spouse for his or her lifetime, and then any remaining assets can be directed to the children. When considering such a trust, you may wish to appoint an impartial third-party trustee who can help avoid potential personal conflicts. You can also structure your trust to defer any capital gains upon your death. When it comes to testamentary spousal trusts, be aware of family law obligations as claims can still be made against your estate.
Save taxes. Recent changes in legislation have reduced the tax efficiency of testamentary trusts, but tax advantages remain if the trust is structured properly and you can allocate the trust’s income or capital gains to beneficiaries in lower tax brackets. For example, income splitting can be achieved by the trustee of a discretionary family trust that includes your children and grandchildren as beneficiaries, if the trustee “sprinkles” income to those beneficiaries who are personally in a lower tax bracket than the trust and have little or no other taxable income.
Ensure prudent management of the trust. If an adult beneficiary does not manage money prudently, you can create a spendthrift trust. This type of trust gives an independent trustee authority to determine how, when and for what purpose the trust’s funds are allocated to the beneficiary. A spendthrift trust is ideal when the beneficiary has trouble controlling his or her spending, plus the beneficiary’s creditors cannot gain access to funds in the trust. Spendthrift trusts are also useful for someone who may be overwhelmed by managing a trust’s funds. By receiving the funds gradually, the young beneficiary can learn how to handle money in a prudent fashion.
You and your family can benefit from choosing trusts to effectively transfer property. Work with your MD Advisor as well as your Estate and Trust Advisor at MD Private Trust to determine which types of trusts are right for you.