Find Out Why It’s Smart To Set Your Young Kids Up As “Trust Fund Babies”
When you hear the term “trust fund baby” it conjures up images of young rich kids, lying around on super-yachts sipping expensive cocktails they don’t even know the names of. Only people with real money can set up trusts for their kids, right? Not exactly. That’s a myth we’re about to bust in this post. If you have young kids and you want them to inherit, you might want to make a provision in your Will to set up a testamentary trust.
What is a Testamentary Trust?
A testamentary trust is a trust contained in a Last Will and Testament that provides for the distribution of all or part of an Estate and often proceeds from a life insurance policy, held on a person establishing the trust.
That’s a bit of a mouthful, so let’s create a hypothetical scenario to explain the importance of a testamentary trust (especially when minors are involved):
Lindiwe is a single mom. She has two small children aged 3 and 10. Lindiwe has a life insurance policy worth R5 million Rand that will pay out to her Estate if she passes away. Lindiwe wants to make sure her children are taken care off, but they are way too young to be handling finances, so she has opted to test up a testamentary trust in her Will.
If Lindiwe passes away, the life insurance proceeds, along with all her other assets, will be transferred into the testamentary trust by her executor (that is the person nominated to handle her final wishes). A trustee/s appointed by Lindiwe will manage the assets in the trust until the trust expires and the beneficiaries receive control of the money.
Lindiwe figures that both her kids need a varsity education and need to turn 21 before they can get their hands on the inheritance.
This makes perfect sense for Lindiwe. She knows that when she passes away, her kids stand to inherit when they are 21, but until then the money, earmarked for them, will be kept safe and be managed correctly in a trust. The children’s legal guardian will be able to approach the trustee/s of the trust for whatever money they need to make sure the kids are feed, schooled and clothed, but will not be able to get their hands on the millions. This creates the level of protection that Lindiwe wants to make sure is in place if she can no longer be around to provide for her young children.
Should you be setting up a Testamentary Trust?
If you have young children, then the question to that answer is a resounding ‘Yes’! In a conventional family set up, Will instructions look something like this.
- If the husband passes away, everything is left to his surviving wife
- If the wife passes away, everything is left to her surviving husband
- If the husband and wife pass away, everything is left to their children
And that’s perfectly fine if the children, standing to inherit, are old enough to manage the money. If they are minors, then set up a testamentary trust in your Will document.
One last thing. Do you have enough life insurance in place to cover all your debt and provide enough income for your kids if you pass away? Why don’t you get a quote through us?
Until next time
The MoneyShop Team