THE KIDS ARE ALRIGHT

Many people want to leave an inheritance to their children. In fact, a recent Citibank survey last year stated that 79 per cent of retirees planned to leave their children an inheritance and 10 per cent of them were living on less income in order to do just this.

It's clear that leaving something for the kids is important, so it's important that our assets are protected and for our beneficiaries to receive them in the most effective manner.

One way of doing this is to set up a trust with the purpose of holding assets for future generations. You can use a Will to set up a family trust which is called a Testamentary Trust. It comes into existence upon the benefactor's death and could provide for your children to receive a regular income and, eventually, assets upon reaching adulthood.

One of the main benefits of a Testamentary Trust is the protection offered against future legal action against the estate and against the beneficiaries. For example, if a beneficiary is successfully sued for whatever reason, the assets held in the trust will not be affected as they are held in the name of a trustee.

There are three reasons why you would want to set up a testamentary trust:

• To have control over where your assets go
• To provide protection to the person you are leaving your assets to and
• For tax reasons.

The type of protection you may want to provide to beneficiaries includes protection from creditors, from future relationship your surviving spouse or children may enter into, or from fears of bankruptcy if a beneficiary is in a high risk profession.

Another advantage of testamentary trusts is that they provide tax breaks. If someone leaves an investment portfolio in a trust, the income from the trust can be distributed at the trustee's discretion.

A Testamentary Trust can assert that income from an investment can be directed to the lowest income-earning beneficiary, for example, if the surviving spouse was a high income earner, then instead of distributing income to him or her, all the investment income could be distributed to the children at their lower tax rates.

This also makes sense because children who receive income or capital gains from a testamentary trust are taxed at adult rates rather than at the normal rates applied to minors, which are very high.

There are many reasons why you would want to control your assets from the grave. One of them is to ensure a disabled child or grandchild is looked after financially.

Parents in this situation want to ensure their disabled child is provided for but know they cannot leave them assets directly - so by setting up a testamentary trust that provides control over how the child receives the money ensures they are looked after properly.

Parents may also want to control the assets they leave to children because they feel they are not financially savvy enough to look after it themselves and it may be squandered.

Tony Martin - Director
Strategic Financial Coach

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