Sunday 9th July, 2006


Avoid ‘smoking deals’ by planning your estate

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In 1935, when the United States developed its social security for old age, disability and health insurance, life expectancy in the US was age 62.

Ironically, social security benefits didn’t begin until a person had attained age 65.

Barry Asmus, in his book: The Best is Yet to Come, described this age differential as a smoking deal for the government.

Today, we examine some types of trusts, and how they can be used.

Charitable trust

A charitable trust is the kind of instrument used to leave wealth for the benefit of institutions, churches and the underprivileged, after one has died. Charitable trusts can have unlimited duration, unlike other types of trusts.

If you died without a will, the Government will distribute your estates according to a formula set out by law. These intestate rules will not accommodate any charitable ambitions or benevolence that you may have had. You will have to hope that your heirs give some charity on your behalf.

Testamentary trusts

Testamentary trusts come into being by virtue of a will, after death. Such instruments are commonly used in cases where the owner of property wishes to ensure that property is managed in the best interests of minors, or to provide income for the lifetime of a surviving spouse. Upon death of a spouse, the income and/ or the remainder of the asset can than be passed to others.

They can also be used to give power to the trustee, to pay money to various parties, whether planned or at the discretion of the trustee. It can allow the trustee to purchase life insurance on the life of a life income beneficiary, for the benefit of heirs. This serves to prolong the consumption of the estate over another generation.

Living trusts

Living trusts can be revocable or irrevocable. To make it revocable is to reserve the right to cancel the arrangements, or to alter it, during the lifetime of the grantor. Such trusts are often used in businesses that are set up as a legal partnership.

If there is doubt about business continuity, upon death of a partner, the business can be automatically transferred to the trust beneficiary, or can be managed by the trustee. Death makes the arrangement irrevocable.

If the trust is irrevocable, the transfer of the property is permanent. One advantage would be to secure the stream of cash flows for a needy or challenged heir.

The trustee

Because of the fact that even within families there can be strained relationships between grantor and beneficiary, eg, the children of a first marriage may not have cordial relationships with the second wife of their father, the trust arrangements can be used to avoid potential personality conflicts and infighting.

This ease of transaction can be furnished by the intermediate role of the trustee, between grantor and beneficiary. Remember the trustee has to be paid for his services, usually a percentage of the value of the trust assets.

However, in this information age, there can be found trust-like instruments and contracts wherein a virtual trustee can manage assets in such a cost effective manner, that it can be a smoking deal for the parties.

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Designed by: Randall Rajkumar-Maharaj · Updated daily by: Sheahan Farrell