Published on July 5, 2016 2:10 pm, by Jen Bakker
Starting a conversation about what is going to happen when you die can be challenging. In fact, rather than a conversation starter it can be a conversation stopper.
It is so important to think about what will happen should the unexpected happen. Who wants their assets divided and handed out according to a formula, with decisions made by somebody you do not know?
Knowing why you need a will and who to choose as your executor are two of the first steps. There are a multitude of other considerations but here we want to untangle some of the mystery around two of them.
What is a testamentary trust?
Testamentary trusts are often used by people for distributing the assets in their estates. They are set up in such a way that the trustee manages the assets of the trust and they are distributed to the beneficiaries. A testamentary trust adds a level of complexity to your will but they are designed to provide flexibility and allow for tax effective distribution of capital and income. They may allow your beneficiaries to qualify for pensions or other benefits they would not qualify for under an ordinary inheritance.
Testamentary trusts can be set up to give the beneficiary the flexibility to decide how and when they will receive their inheritance. The beneficiary may maintain control over who the trustee is and advise the trustee on how to pay out the inheritance. This allows beneficiaries on a high marginal tax amount to receive their inheritance in the most tax effective way. Beneficiaries who are the recipients of welfare payments, may wish their inheritance distributed in such a way as to minimise any changes to their payments.
Testamentary trusts can also be set up to protect the inheritance of assets. This may be in the situation where you are concerned about marriage breakdowns, mental health or overspending by one or more of your beneficiaries. The assets in a testamentary trust are owned by the trust, not the beneficiaries, so in the instance of marriage breakdowns they cannot be split by the Family Law court. Where spending is an issue, the trust can be set up so that the trustee has the authority to distribute money as per the set-up of the trust.
Where you have young children, you can decide on how the inheritance is distributed. For example, you may want them to receive a small amount at 18 and 21, with the bulk of the estate a little older. Different taxation rules will also apply with trust income to a straight inheritance.
A Testamentary trust may not always be the best option, and you will also need to consider any costs incurred for the period the trust operates. A testamentary trust can be tailored to suit your requirements in similar ways to the creation of a trust when you are alive.
Who will look after my children if I die?
Choosing a Guardian for your child in the event of your death is a difficult thing. Lots of us have trouble with this because we can’t get past the thought that we are the best person for the job and nobody else will match up. Ordinarily where you are survived by the other parent of your child, their care would fall to them. If you both die before your child or children turns 18, they will have a Guardian appointed.
Where you don’t choose a Guardian the decision will be made by the family court. Even when you have appointed a Guardian more than one person may wish to care for your child. In this instance your will may be challenged and the Family Law court will then make a decision. The Family Law court will take into account your wishes, which makes it important that you have specified them so that what you want for your children weighs in.
There are so many things to consider when choosing a Guardian. Think about the cost to raise your child, where your preferred Guardian resides and whether moving schools and home at a difficult time is in their best interests. Also do the values of this person align with you and your spouse or partner? Are they prepared for this responsibility and do they understand your views on how they should be raised? You may also wish to choose an alternative Guardian in the event that things change between you writing your will and it taking effect.
Financially raising your children should not impact your intended Guardian. So it’s important that you think about housing, education and the ongoing costs of your children’s lifestyle when you are making your will. It may be the optimum time to look at your life insurance and consider whether it’s sufficient to fund the lifestyle of your children in the event you are no longer around.
Ordinarily your money would be in a trust to be distributed for the expenses associated with raising your children. It is best practice that the trustee of this is a different person to the Guardian of your children.
If you are in any doubt about what to do and how to set things up, we recommend that you seek advice from a legal and/or financial professional.
Jen is an experienced banking professional who loves wine, coffee, finding a bargain and of course her three beautiful children. Since Jen's first budget led her to buy a home at 20, Jen has passionately helped others to make better decisions with their money.