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How does life insurance benefit a Testamentary Trust?

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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.




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