Ways to keep control over your legacy

December 25, 2013 • Estate Planning

How would you feel about leaving a large, lump-sum inheritance to an adult child or grandchild who has little experience handling money? Or passing on sizeable assets to a spouse or beneficiary who has never been in charge of an investment portfolio?

Those are just a couple of examples where some people may decide to retain some control over a financial legacy, and how beneficiaries may use it.

There are several options available to help maintain control over an inheritance. One is through a testamentary trust that takes effect upon your death. And another little-known choice can be applied in specific situations: a life insurance product with an annuity settlement option.

Pay out benefits over time

An annuity settlement option pays out the proceeds of a life insurance product over time, whether it’s a life insurance policy, segregated funds, or guaranteed investment funds. Your beneficiary receives an annuity that makes periodic payments over a specified number of years, or for life — the choice is yours.

The beneficiary will not be able to change the payment schedule, so you must be satisfied with the fixed term, rate of payments, and the amount of the payments.

This insurance option may be appropriate in cases where a beneficiary is a younger adult or someone who may be best served by receiving an inheritance gradually. Another person can be named to manage the money on the beneficiary’s behalf, making the annuity settlement option suitable to provide for minor children or individuals with a disability.

A traditional trust

A testamentary trust, which takes effect upon your death, can provide greater control to fulfill your wishes. Through a trust, you could stipulate that certain amounts of an inheritance are to be issued at specific times and direct how assets are to be used.

For example, you could direct a trust to be used for education savings and spell out how the money is to be used if the beneficiary doesn’t go to university. Or you could hold a family vacation property in a trust so that children and grandchildren can enjoy it, under rules and guidelines you set for its maintenance, use, and ownership.

You can also name a trustee and assign authority to manage trust assets on a beneficiary’s behalf. This level of control can make a trust a suitable option if a beneficiary is young, has a disability, or simply requires help from a financial expert.

You can also dictate different uses of a trust’s capital and income. For instance, you could ensure that beneficiaries receive income generated by the trust during their lifetime, with any remaining capital given to a designated charity after that. Or, someone in a second marriage could direct trust income to a spouse during his or her lifetime, leaving the capital to benefit children from the first marriage.

Pros and cons

An annuity settlement option offers a simple way to break up a lump-sum benefit into a gradual payout. It’s also simple to implement and manage, making it an easy solution when the main objective is to provide an inheritance over time.

In contrast, a trust is more complex and can be expensive to establish and manage, but allows for almost unlimited control over how an inheritance is managed and given to beneficiaries. Also, where an annuity settlement option involves payments from an annuity, a trust allows you to have assets invested according to your wishes or assigned to the trustee, offering control over the type of investments and the objective.

We can help you protect the financial security of your loved ones and the legacy you leave, through the strategies and products best suited to meet your objectives.

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