Passing an inheritance to your grandchildren
Is it better to leave your assets directly to your beneficiaries or through a trust? It's a difficult choice.
An outright gift has the attraction of simplicity. But in many instances, a testamentary trust makes more sense, particularly if your intended beneficiaries are minor grandchildren.
The trust advantage
Because minors aren't generally allowed to manage their money, any property left directly to minor grandchildren may end up being paid to and managed by a court-appointed representative. "With a testamentary trust, you can choose trustees who will manage your assets in the best interests of your grandchildren," says Christine Van Cauwenberghe, LL.B and Director of Tax and Estate Planning at Investors Group. "You can also direct how the assets are managed and how the trust income and capital are distributed."
Even if your grandchildren are close to the age of majority (18 in most provinces), a trust can offer advantages. It's an effective way to ensure that assets are properly managed. Ongoing management may be particularly important if the value of your assets is very large or if you're concerned about your beneficiaries' ability to manage their finances. And, trusts can open up certain income-splitting opportunities.
"Each testamentary trust is treated as a separate taxpayer, subject to graduated tax rates," advises Van Cauwenberghe. "At the option of the trustee, income paid to a beneficiary can be reported either by the beneficiary or on the trust's tax return."
Although the trust cannot claim any personal tax credits, the individual beneficiaries can. The basic personal exemption alone allows each individual to shelter over $8,000 from tax. You may even be able to multiply the income-splitting opportunities by creating separate trusts for each grandchild.
The trustee's role
You can allow the trustees as much or as little discretion as you wish. "Because the needs of your grandchildren can change significantly over time, you might want your trustees to have the flexibility to choose between paying trust income to your grandchildren and allowing it to accumulate," mentions Van Cauwenberghe. "If you create one trust for all your grandchildren, you can give your trustee the discretion to make distributions in unequal shares—useful in case one grandchild has special expenses."
You may also wish to give your trustees the ability to make payments from capital for specific purposes. For example, you might give your trustee the discretion to dip into capital to pay a beneficiary's medical expenses, university tuition or down payment on a home.
Professional advice
Testamentary trusts are flexible estate planning tools that can accomplish many objectives, but professional advice is recommended. For example, unless the trust is structured properly, a beneficiary may be able to force payment when he or she reaches the age of majority. In addition, trust legislation varies from one province to the next.
To learn more about the uses of testamentary trusts, contact your Investors Group Consultant.
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This article, 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.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
