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Saturday, October 17, 2009

Instead of giving money to aging parents, put it in a trust

Here is a hypothetical situation: you and your spouse are making new Wills, and you want to make some financial provision for your widowed mother, who is getting on in years. You are concerned that if something happens to you, your mother might not have enough to live on just with her pension. Your three siblings live too far away to see your mother as often as you do.

Often clients bring up a similar scenario and name a sum of money they would like to leave in their Will to their mom. While there is certainly no reason you can't do that if you want to, I'd like you to consider the following two situations before you make a final decision.

Scenario 1: You state in the Will that your mother is to get $50,000 outright. Your mom receives the money but when she passes away there is still $40,000 left. The $40,000 is distributed according to her Will, which leaves everything to her children. As you are her child, your share is $10,000, which, because you are already deceased, goes to your children. The other $30,000 is divided among your siblings.

Scenario 2: Your Will sets up a trust for your mother for $50,000 with no limits on what she can use. When she passes away, there is still $40,000 left. The trust says that when your mother passes away, any money left over is to be divided among your children. So your children get $40,000 (your siblings don't get anything!).

This is just an example of how you can direct where money is to be paid using a trust. You will have satisfied your immediate goal of providing for your mother, but you will also maximize the amount your children will get. This is something you can talk over with your estate planning lawyer at the time your Wills are being discussed.

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