# Testamentary Trusts and Annuities etc.



## dogleg (Feb 5, 2010)

How would you deal with this situation ? A couple wishes to spell out in their will, a plan that would provide for a ner-do-well child. The child would get a steady income for life funded from the estate. Would you set up a testamentary trust , an annuity or some other instrument ? Consider a modest estate say around half a million. Consider also a likely ten year time period from present till the implementation of the provisions in the will. Since I was asked for advice on this issue I have done a bit of research but have come to no conclusions - certainly none that I would want to take responsibility for .


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## FrugalTrader (Oct 13, 2008)

I went to a talk with Jamie Golembek who recommended Testamentary Trusts. I believe these trusts have to be setup by a lawyer. Another poster mentioned that he was quoted about $2k to setup with ongoing fees once it is implemented.


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## humble_pie (Jun 7, 2009)

it's true, the language about trustees sounds as clear & effortless as a sunny blue sky in june.

how many people, i wonder, sign wills cheerfully consigning some or all of their assets to generic "trusts" for spouses, children or grandchildren, because the concept, as explained by the lawyer, sounds perfect.

and how many of these people actually research what kind of fees professional trustees are charging these days.

ouch. They'd get a shock. Price is high. I've already posted one message mentioning that professional trustees will always follow the "prudent man rule" & invest trust assets in highly conservative instruments like bonds or preferred shares. One might see current return of 2-3%, before trustees' fees, from such a portfolio. 

meanwhile the trustee's fees will be based on the book value - sometimes even on the market value - of a portfolio. Double ouch.

what it boils down to is that most of a modest trust's current yield will be eaten up by the trustee fees, leaving little or nothing to be made over to the beneficiary whom the testator (by now powerless, being quite dead) sincerely wished to help.

this is why an annuity might be a preferred route, imho. To protect against the default of one insurance company, a testator could mandate two or more annuities with different insurers.

it's not really a savings to name one's brother or cousin or one of the less-wayward children as "trustee." This situation will probaby lead to quarrels as the wayward heir demands more & more. I don't think anyone would want to put a family member in that situation, as trustee, for decades to come.

in addition the legal & financial responsibilities of a trustee are considerable, including maintenance of financial records, filing of trust tax returns, and evidence of proper arms' length conduct at all times. Most lay persons would want to give that responsibility over to a trust company, anyhow. And thus we're right back to point zero, the spot where the fees begin ...

of course jamie golombek likes trusts. He's in the business of providing executor & trust services to clients who are drawing up wills. But did anyone in the audience, anyone at all, question him about annual trustees' fees in dollars & percentages of assets.

btw frugal, i'm no lawyer but here's my basic understanding as a lay person. A testamentary trust does not come into existence until the testator dies, so there's no charge to set this up while T is still alive.

the $2000 fee you are referring to would be, i believe, for an inter vivos trust, which is one in which the trust donor is still alive.


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## dogleg (Feb 5, 2010)

Thanks . Based on these comments it seems to me that my friends would be better to set up an annuity for their child . I suppose the sooner this is done the better the rates. If it is left until after the parent's death ( ie. after the execution of the terms in the will) then the costs would be higher and the payouts smaller. Maybe some kind of deferred annuity is possible . The catch ,I think, is setting up a plan that is binding and can't be changed by the recipient. Maybe even a laddered bond fund would work if it could be made binding . Lots of unanswered questions.


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## MoneyGal (Apr 24, 2009)

This is a complex topic, beyond the scope of an internet forum. 

Some of the questions for which different answers provide very different paths:

- is the child a minor?
- is the estate in a common-law province (i.e., not Quebec)?
- will any part of the estate be funded by life insurance?
- how important is it that the income be provided for the lifetime of the child? 

The main reason for using testamentary trusts (= trusts which come into existence upon the death of the testator) is the degree to which they provide ongoing control (even after the death of the testator, through the instructions to trustees). 

If, in contrast, an estate provides for the direct distribution of an inheritance to a child (who has reached the age of majority), there are no restrictions on how that child may spend the money. Trusts provide an intervening factor to keep the testators' wishes alive through the duration of the trust. 

If it is critical that income from the estate or trust last for the lifetime of the child, the only solution is to have the estate/trust purchase an annuity with some or all of the proceeds. There are no other instruments which provide a guaranteed lifetime income. There are several risks inherent in this strategy, mostly interest rate risk if the child is young. This risk is typically mitigated by purchasing an annuity with a guarantee...but if there is no survivor of the child, the guarantee is of no use. 

Trust practices have really evolved over the past decade. Where it used to be that trustees would essentially choose investments from a restricted list, today (in most jurisdictions) trustees are to be guided by modern portfolio theory in constructing and maintaining the portfolio. 

Very few individual investors have the knowledge and confidence to construct and maintain optimal portfolios which adhere to the trust specifications without relying on the advice of financial institutions. (Unlike managing your own portfolio, in managing a trust portfolio you are required to demonstrate how your actions adhere to the trust specifications, and you are liable for deviations.)

Finally, the questions you've laid out in your original post aren't really either/or problems. If the parents wish to retain (some) control over the child's spending/inheritance after they pass away, practically speaking the best solution is to use a trust. And if it is critical that income be provided to the child for life, the only solution is to use an annuity. Professional estate planning services would be appropriate here.


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## MoneyGal (Apr 24, 2009)

dogleg said:


> Thanks . Based on these comments it seems to me that my friends would be better to set up an annuity for their child . I suppose the sooner this is done the better the rates. If it is left until after the parent's death ( ie. after the execution of the terms in the will) then the costs would be higher and the payouts smaller. Maybe some kind of deferred annuity is possible . The catch ,I think, is setting up a plan that is binding and can't be changed by the recipient. Maybe even a laddered bond fund would work if it could be made binding . Lots of unanswered questions.


Actually, annuity rates are better the older the child is: because as you age, the shorter is your remaining expected lifetime, and thus the higher the payouts. (This is also a really terrible time to be purchasing an annuity for anyone under about age 70, due to the low interest rate environment.) 

The parents could choose to purchase a deferred annuity for their child. The last time I checked (sometime last year), I could not get a quote for an annuitant under the age of 35, no matter when the payments were expected to start.

You could use a laddered bond strategy if you established a trust and put those terms in the trust. The child could always petition the trustee to change the terms of the trust, however. And keep in mind you are now deviating from the wish for lifetime income for the child.


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## dogleg (Feb 5, 2010)

MG et. al. : Thanks for all the input. You folks seem to know a lot about annuities. I am just learning from what I can find out on line and from a book called "You Can't Take it With You". Evidently I have the wrong concept of a trust : From your data the 'trust' is just a legal agreement enforced by law and administered by a trustee. The flow of funds in the trust could be an annuity or whatever depending on the wishes of the parents. I only know the general situation for the family . The parents are in their late seventies and they have two kids ; one who is married and doing very well and the other unmarried son who is in his late forties I think and couldn't run a peanut stand as far as I can tell. They know if they leave half their estate unrestricted to their son it will be gone in five years . Naturally they want to set up some kind of arrangement to keep him solvent and also to prevent him from blowing the money. They told me they didn't want to leave the control over the estate to the older child, who is financially secure, because of sibling rivalry issues . Maybe I should just suggest they see a lawyer but I believe it will turn out to be very expensive on an ongoing basis and may not follow their wishes. Seems like a simple problem but when legal mechanisms come into play that changes things. Couldn't they just set up a deferred annuity that would kick in when the estate is settled ? I presume the older son will be their executor . Once it is set up the recipient couldn't change it could he ? Anyway thanks again . How do I get into these situations ! Stupid maybe ?


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## humble_pie (Jun 7, 2009)

yes, MG's comments are so interesting & valuable, aren't they. I wish our member racer would appear as well, with her delicate precision in illuminating the most difficult & tricky details in a legal situation (racer is a lawyer.)

actually i was thinking that it was an adult beneficiary, and not in quebec either. The later the estate opens, the older the beneficiary will be ... and the higher the annuity, as MG says.

a question to discuss, certainly with the lawyer drawing the will (s) is whether the wayward child is receiving any government disability benefits; and what will happen to these benefits if he also begins to receive income from an annuity.

there used to be trusts that had deliberately vague language concerning the paying out of trust income. Trustees were instructed to pay out income only for things like "comforts" and "extra amenities." The idea was to not jeopardize any basic government dole the beneficiary might already be receiving. I have no idea whether this approach works today or not, or how it is utllized on a province-by-province basis.

also, i have no idea how this approach could be tailored to an annuity, which is a great deal more cut-and-dried than a hand-tailored trust. All i can say is that many ageing parents of special adult children have faced this dilemma. Often, the health organizations that work with such parents & families know of solicitors who have expertise in these matters. They are familiar with how to provide for an adult child who is, at best, difficult, and at worst, severely handicapped.

dogleg, might you & your friends persist in finding such a solicitor. It will be worth the search, i do believe. I wish you all the best possible success.


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## MoneyGal (Apr 24, 2009)

dogleg said:


> Couldn't they just set up a deferred annuity that would kick in when the estate is settled ? I presume the older son will be their executor . Once it is set up the recipient couldn't change it could he ?


This is one of the benefits of an annuity in this situation; the money is gone and in the hands of the insurance company or companies. 

There's no way to set up a deferred annuity that only kicks in when the estate is created, because you don't know in advance the date of death. The parents could set up an annuity now for their child, essentially doing a "warm hands" transfer of some portion of their assets to him before their death.


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## allgood (May 17, 2010)

humble_pie said:


> there used to be trusts that had deliberately vague language concerning the paying out of trust income. Trustees were instructed to pay out income only for things like "comforts" and "extra amenities." The idea was to not jeopardize any basic government dole the beneficiary might already be receiving. I have no idea whether this approach works today or not, or how it is utllized on a province-by-province basis.
> 
> also, i have no idea how this approach could be tailored to an annuity, which is a great deal more cut-and-dried than a hand-tailored trust. All i can say is that many ageing parents of special adult children have faced this dilemma. Often, the health organizations that work with such parents & families know of solicitors who have expertise in these matters. They are familiar with how to provide for an adult child who is, at best, difficult, and at worst, severely handicapped.
> 
> dogleg, might you & your friends persist in finding such a solicitor. It will be worth the search, i do believe. I wish you all the best possible success.


These trusts are generally known as "Henson Trusts" and they do work today. The language used gives total discretion to the trustees over any payments to the beneficiary. Because the disabled beneficiary has no right to demand income, and because the assets of the trust vest in another person after the death of the diabled beneficiary, the money in trust cannot be said to actually belong to the beneficiary, and thus cannot be counted as an asset for means-tested benefits such as ODSP. 

However, whether or not such a trust is appropriate in this case (the OP didn't mention government benefits or a disability?) is a decision that should be made in consultation with an experienced wills and estates lawyer.


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## MoneyGal (Apr 24, 2009)

A little more information on Henson Trusts (just a wikipedia link): http://en.wikipedia.org/wiki/Henson_trust

These are ONLY appropriate for disabled beneficiaries who are unable to exercise their own discretion..not in situations where someone wants to control spending from beyond the grave.


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## Karen (Jul 24, 2010)

Is it possible for a will to instruct the executor to set up an annuity payable to the beneficiary after the death of the parents?


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## dogleg (Feb 5, 2010)

Thanks again to all. I talked to a friend this morning who suggested these folks just redraft their will to spell out clearly that they want the executor ( the elder son I presume ) to set up an annuity for his "ambitious" brother with part or all of his proceeds from the parent's estate . If the annuity is binding then it should, I assume, do what they want done . Whether this aspect of the will would be legally binding I don't know . Could the executor just ignore it ? My guess is these good folks wouldn't likely go to a lawyer and set up a formal trust. I think they would be inclined to trust their oldest boy to comply with their wishes. These things are never 100% cut and dried are they ? Thanks again for all your input . Once I am clear in my own mind I will chat with them further and give them my best advice based on what I have learned from you folks and others . My bank suggested I talk to their Wood Gundy agents about it . I expect they will try to be objective since I am a third party not a customer .


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## MoneyGal (Apr 24, 2009)

Karen said:


> Is it possible for a will to instruct the executor to set up an annuity payable to the beneficiary after the death of the parents?


Absolutely. It might not be the optimal solution from the point of view of interest rate risk, but it is a way to provide lifetime income and, conditional on the child's survival, is the most efficient way.


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## humble_pie (Jun 7, 2009)

_" I talked to a friend this morning who suggested these folks just redraft their will to spell out clearly that they want the executor ( the elder son I presume ) to set up an annuity for his "ambitious" brother with part or all of his proceeds from the parent's estate . If the annuity is binding then it should, I assume, do what they want done . Whether this aspect of the will would be legally binding I don't know . Could the executor just ignore it ? My guess is these good folks wouldn't likely go to a lawyer and set up a formal trust. "_

dogleg i don't want to rain on your parade but the above thinking is too confused imho.

when you say "they want the executor ... to set up an annuity for his ... brother ... with part or all of his proceeds from the parent's estate," whose "his" are you talking about when you say "his proceeds."

if by this "his" you mean the son who is the executor - that is, 100% of the estate will devolve to the favoured son who is the executor, and he shall then be expected to cut off a portion to purchase an annuity for his brother the wayward son - this is, to put it bluntly, terrible. I'm no kind of lawyer, but i'll be happy to say that this is Terrible with a capital T.

whether your friends want to see an experienced lawyer or not, they pretty much have to take this step. Only a lawyer will be able to draft a binding will. BTW unless your friend (s) is a widow or widower, this couple will need a pair of wills, one for each.

if the parents choose the annuity route the executor, whoever it may be, will be directed to divide the residual estate into the proportions the parents name in the will. Let's say it's going to be one-half to each son, and the wayward son's half is to be in the form of an annuity. Only a lawyer will know how to word this, but in some provinces, for example quebec, the executor could be directed to take this half of the estate & purchase an annuity with it, to benefit wayward son.

the executor, whoever it may be, will also be directed to dispose of the other half of the residual estate, presumably to the favoured son in outright ownership. Here again, a lawyer is essential, because thought must be given to a situation in which favoured son might predecease both of his parents ... just as thought must be given to situation in which wayward son might predecease ...

dear dogleg please don't even think of encouraging your friends to "just redraft" their wills by themselves. I can't see what wood gundy would have to say about it either, other than to encourage the parents posthaste to an excellent solicitor specializing in wills & estates.


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## dogleg (Feb 5, 2010)

Tomorrow I am golfing with a lawyer friend and I will run all this by him . I will let you know what his advice is . The parents tell me that their will currentlly divides everything equally between the two boys and the older one is named as the executor. So it seems they just need to modify their existing will to specify that the son in question will have his half used to set up an annuity for him. From the information on this board and other reading I have done it seems to me that a trust is something that might be needed in a complicated situation where a lot of money is involved and where several people are affected by it . Just a good way for a lot of third parties to make a bundle of money. So after tomorrow I should be able to convey some reliable information to these good folks. Thanks again to all.


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