Late in 1995 I got an unexpected bonus just for showing up at work.
The branch bank manager slipped into my office, and announced that a local hockey hero's mom was downstairs with her son's recently acquired Stanley Cup championship ring.
The rare treasure was on its way to the safety of a bank vault when the kind hockey mom allowed our staff to take a moment with it before putting it away.
The ring was hefty and ornate. The gentle woman allowed me to handle it with my bare hands and even encouraged me to try it on. Elated, I forced the ring on to my moderately chubby banker's right ring finger.
Gazing at my suddenly heavy right hand, I slipped into a hockey dream world, only to be quickly awakened by the good lady who wanted her son's treasure back.
I had serious trouble getting the ring past my knuckle when she casually commented: "Oh that's no problem, we can cut it off."
A quick glance her way told me she wasn't talking about the ring.
Knowing that she wouldn't want me to leave her sight, a trip to the washroom or kitchen for some soap was out of the question. The solution?
Well... fingers are precious too!
I licked the ring and the big knuckle on my finger, slipped ring over the bump, wiped it off on my shirt and handed it back to the generous woman who was now good-humoured enough to be smiling.
As valuable as the rare metals in the ring might have been, the sentiment of time and energy put into such an achievement are even more so.
It is impossible for someone who hasn't spent a lifetime building a reward to appreciate its inheritance. There is even a legal and financial mechanism to deal with the beneficiary who is mismatched with his inheritance. It's called a testamentary trust.
What is a testamentary trust?
A testamentary trust is a trust or estate that is generally deemed to have been created on the day a person dies.
The terms of the trust can be established by your will.
What 19-year-old is likely to responsibly and capably manage the wealth of a 60-year-old benefactor who just passed away? You can direct your trustees to hold and invest the child's inheritance in a testamentary trust until the children reach an age you consider appropriate.
Strategic benefits of a testamentary trust
Reasons to consider amending your will to include a provision for a testamentary trust can be compelling, depending on the age, maturity and financial common sense your beneficiaries demonstrate.
For example, assume a widowed mother has an RRSP where her adult son or daughter is the designated beneficiary. Upon her death, the mother may fear that these assets:
Will be spent irrationally by the son or daughter;
Will be invested poorly by the son or daughter;
Will be subject to creditors of the son or daughter; and/or
Will be accessible to the son or daughter's spouse.
Due to the mother's concerns, she may consider not naming the adult daughter as the designated beneficiary on her RRSP and amend her will so that these RRSP assets pass through her estate and into a testamentary trust for the daughter's benefit.
Although probate taxes may now have to be paid, the testamentary trust allows for the following:
The mother can now appoint a trustee to manage these assets for the daughter's benefit.
The mother is able to provide instructions in her will for the amount of income and timing of the income to be paid to her daughter from these assets.
The assets in the testamentary trust may be protected from potential creditors of the daughter.
The assets in the testamentary trust can potentially be shielded from the daughter's spouse.
What do I need
to do now so that a testamentary trust is established at my death?
1. Amend your will to provide for the establishment of a testamentary trust. This means meeting with a lawyer familiar with estate planning, and some professional fees. These fees will likely pale in comparison to the amount of money at stake in your will/estate.
2. Assets that you currently own may need to be restructured so that upon your death they will "flow through your estate". Again, a lawyer who is well-versed in estate matters will help with the details.
3. Beneficiaries on RRSP/RRIF assets may have to be removed so that these assets pass through the estate. Note that an exception exists with insurance policies. That is, it is possible to transfer a death benefit payable from an insurance policy into a testamentary trust without the assets forming part of your estate and without probate taxes being paid.
This document is intended to provide a general overview of testamentary trusts. If you are interested in pursuing the ideas herein, you should consult your legal and tax advisors to determine they are appropriate for you.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
