Though the pandemic now feels like a distant memory, it did bring about some positive changes. One notable outcome was that many clients began to take a closer look at their estate planning. In doing so, some discovered that they were concerned beneficiaries might not be able to responsibly manage their inheritance. As a result, we’ve been assisting some clients in exploring various options while they refine their estate plans. Here are three potential strategies:

1. Set up a testamentary trust

A testamentary trust takes effect upon your death and is managed by a trustee to pay out portions of their inheritance over time, based on a predetermined payment schedule and timeline. It can specify terms to encourage certain types of behaviour, such as tying income to employment – e.g., “monthly income will increase if the beneficiary maintains a job for x years.” Or, it can put constraints on inheritance payments – e.g., “capital won’t be distributed until the beneficiary completes their education.” Note that there are legal limits to these types of restrictions, depending on your particular situation, so please consult a qualified trust and estate lawyer. However, a testamentary trust may be a good option for heirs who lack financial maturity, are living with a disability or are otherwise financially vulnerable, as it helps support the longevity of wealth over time and can encourage responsible behaviours.

Disadvantages – Generally, with some exceptions (such as qualified disability trusts or graduated rate estates), income taxed within a trust will be subject to the highest marginal income tax rate. There are also associated costs, including the initial set up, trust administration fees and other management fees. The trustee, or the person who is appointed to manage the trust, will also face ongoing administrative responsibilities, including bookkeeping and tax returns. As an alternative, you might consider hiring a professional trustee to manage it and reduce any potential burden, though this would add to the overall cost.

2. Direct a portion of the inheritance to a life annuity

A life annuity is an insurance product that is designed to pay a guaranteed income for life to the beneficiary, similar to how a pension plan benefits a retiree. The beneficiary will receive a monthly income over their lifetime, providing financial stability.

Disadvantages – Allocating funds to an annuity will not allow for income flexibility or the potential for higher investment returns, as capital is committed to paying for the annuity and the annuity will pay a set amount over the beneficiary’s lifetime. It also restricts future legacy planning – once the beneficiary passes away, payments will cease and there will be no money available for the beneficiary’s heirs. Unlike a testamentary trust, the life annuity doesn’t allow for potentially influencing the behaviour of the beneficiary.

3. Introduce your beneficiary to us, your trusted advisors

We are here to build a relationship with your beneficiaries, which may be worthwhile if there isa need to foster financial literacy or build responsibility. By getting to know us early, your beneficiaries may better learn and understand your own financial values. We can also provide support for family meetings, to discuss the intentions behind your estate plan or help to direct financial planning, estate distribution and the responsibilities that come with inheritance.

Disadvantages – While establishing this relationship can be highly beneficial, it does not provide the same structured control as a trust or annuity. The success of the beneficiary depends heavily on their willingness to engage and learn. Additionally, there is no guarantee that the beneficiaries will adhere to the financial guidance provided.

These are just a few considerations that may help set up beneficiaries for longer-term success. Each comes with its own set of advantages and drawbacks, so it’s important to determine the best fit for your situation.