Inserting a testamentary trust clause in your will is one way of helping to ensure your money goes where you want.
Inserting a testamentary trust clause in your will is one way of helping to ensure your money goes where you want.

Trusts can protect inherited money

MOST of us will face the challenge of trying to protect the estate we spent a lifetime building. One option is to include a testamentary trust clause in your will.

Think about a wealthy retired couple with three children and several grandchildren.

The eldest has a high net worth and a stable marriage, the second is in a rocky relationship, and the third is battling along in a business that may go belly up at any time.

The retirees have substantial assets they wish to leave to their children, and expect that they would be eventually bequeathed to the grandchildren, but they are savvy enough to realise that simply leaving a third of the estate to each child could create a minefield.

The eldest child has more than enough income now, money inherited by the second one could be up for grabs in a divorce settlement, and creditors could seize any money left to the third child if his business went bankrupt after their death. The solution is to leave the money to three testamentary trusts - one for each child. Then, when the parents die, one third of the assets will go to a testamentary trust for each of the three children and will not be held by them personally.

This keeps the assets separate in the event of divorce or bankruptcy but also has taxation advantages if everything goes well.

Because the assets would be held in the name of the trust, with the trustees (the children) having complete discretion over where the income is diverted they could pay each grandchild $18,200 a year tax-free.

There is no restriction on what the grandchildren do with the money, but it could be used for such expenses as school fees and uniforms.

In other words, the first $18,200 of these non-tax- deductible items could be paid from pre-tax dollars, not after tax dollars.

Furthermore, when the children die, there are no costs to transfer the assets to the grandchildren because the assets remain the property of the trust.

In short, testamentary trusts are simple in operation, and highly effective in saving tax and protecting your assets.

Just make sure you take advice from your solicitor, financial adviser and your accountant before you change your will.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: