Your will is the foundation of your planning, and should be reviewed regularly to ensure that it is up to date.  Experts recommend that you review your will at least every 5 years, or upon a major event such as the birth of a child, change in marital status, new business, or a change in the marital status of a beneficiary.

Basically, your will has three main functions:

1. Most commonly, people think of their will as a document that dictates how the estate is distributed.  For most young couples, the will commonly states that all assets will go to the surviving spouse, and failing that, the assets are left to the children in trust.  The will appoints have an executor named (an individual who is responsible for carrying out the directions of the will), and if there are minor children, the parents also pick a guardian for the care of the children if they are gone.
2. The will can also be used for control, and to direct and to protect assets on behalf of future generations.  A good will can create structures that ensure that important assets remain in the family, and are not subject to the problems that may be created by bankruptcies, marital breakdowns or other crises in the future.
3. Less commonly known, however, is that proper will planning also has the ability to create tax benefits for surviving spouses, and for future generations.  These tax benefits are subtle, but can be used to create rather impressive tax savings over time.

With proper planning, a will can create one or many “testamentary” trusts to leave behind for its beneficiaries.  A “testamentary” trust is a trust that is created by someone’s last will and testament (hence, “testamentary”).  Trusts that are created while living are referred to as “inter vivos.”

The main difference between inter vivos and testamentary trusts is their tax treatment.  An inter vivos trust has no inherent tax benefits and pays tax at the highest marginal rate on all income.  However, a testamentary trust is like a new taxpayer: it has the same marginal rate treatment as an individual.

Why is this important?  Because testamentary trust planning may allow the estate to be divided into “new” separate taxpayers that pay tax a the lower marginal rates, rather than at the higher rates.  For each new taxpayer created, this allows the estate to save approximately $20,000 of taxes payable per year.

So what are some methods for creating testamentary trusts in the estate?  Below are some common and simple approaches, and some of the benefits.

• Spousal Trust:  The spousal trusts is has two advantages.  First, it can help ensure that the assets of the family remain within the family, regardless of subsequent marriages of a surviving spouse.  Secondly, in re-creates a taxpayer in the place of the former spouse, and allows the estate and surviving spouse to achieve income splitting for the remainder of their life.
• Life Insurance Trust: More and more, life insurance proceeds are being used to receive the proceeds of life insurance policies.  These have to be arranged carefully, but these can be set up to avoid probate and creditors, but maintain their tax status into the future, securing marginal tax rate treatment on growth of investments, making life insurance proceeds even more tax effective in the long term.
• Children/Grandchildren: It is possible to set up a trust for each child and/or grandchild in your will (although not necessarily practical).  However, and individual with an estate large enough could create a new testamentary trust for each beneficiary, and would endow that beneficiary not only the value of the gift left behind, but also the benefit of income splitting on that income for the rest of the beneficiary’s life, if they choose.

Estate and trust planning is an extremely complicated and involved process, and the considerations for certain structures go beyond simple control and taxation benefits.  However, it might be worth exploring some of these strategies with your current estate planning lawyer to understand how you can maximize the tax effectiveness of your estate.

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