Like many Americans, you’ve probably heard about at least some of the benefits that a living trust can provide. Trusts have, after all, become a popular part of many estate planning efforts in recent years – in no small part due to the way in which these important estate tools have advanced over the last several decades. They’ve evolved from something that only benefited the truly wealthy to relatively commonplace tools that can benefit many average American families. Still, a living trust isn’t for everyone. If you’re someone who’s unsure about whether it’s worth your while to create a living trust, then another kind of trust might be a better solution: the testamentary trust. Here are some simple facts that you should know about how these trusts might benefit you.
What is a Testamentary Trust?
A testamentary trust is one of the two basic trust types that you can choose from. The first, of course, is the living trust. The living trust is created during your lifetime and remains in existence throughout the rest of your life – unless you revoke it, that is. With the testamentary trust, that is not the case. Instead of being created by you while you’re still alive, this type of trust remains inactive within your Last Will and Testament, and only comes into effect when you die.
How Do You Create a Testamentary Trust?
Testamentary trusts are created using provisions in your will. As the trust settlor, you appoint a designated person to serve as trustee when you die, and that person manages the funds assigned to the trust – usually on behalf of the beneficiary. That trustee relationship continues until the beneficiary takes control of the money at some future date. In short, the trust is not active while you’re alive, but instead comes into being after your estate has been settled.
It is important to note that these trusts are amendable while you’re still alive, since they are not in effect. That makes them far easier to change than inter vivos trusts. You should also know that the trust will become irrevocable as soon as you die, so any changes that you want to make to it much be made while you are still alive. Neither the trustee nor the beneficiary will have any power to alter it once you’re gone.
Does the Testamentary Trust Operate Like a Living Trust?
Living trusts are popular due to their great degree of flexibility. You can accomplish a wide variety of estate planning goals with those trusts, ranging from asset protection and distribution to Medicaid planning and more. Testamentary trusts have the basic features that you find with a living trust, and operate in a similar manner. Once created, care and maintenance of trust assets is overseen by the trustee, with distributions made in accordance with the terms of the trust.
The trust usually has specific terms and limitations, especially relating to time. Testamentary trusts are typically created for minor children, since parents cannot pass money directly to them in their will. By using this type of trust, the settlor can ensure that his heir receives an inheritance, but only when he or she reaches a certain age or meets some other life milestone – like graduating from college. Until that point, the trustee is responsible for managing the funds, and has discretion to use those assets in a way that benefits the heir.
Does This Trust Avoid Probate?
Many people choose living wills to help them plan their estates in a way that avoids probate. They do that for several reasons, but the desire to minimize estate settlement costs and avoid lengthy proceedings are often among the most commonly cited motivations. The testamentary trust does not avoid probate, so if that’s your main motivation then this is not the right kind of trust for you.
Since the trust doesn’t get created until your estate is settled, that necessarily requires that the probate process be used. Your estate will need to have an executor to collect assets, identify creditors, pay debts and taxes, and perform all the many other tasks related to the probate process. At the end of the process, your trust is created and the trustee takes control over the assets.
Even then, the probate court’s involvement doesn’t come to an end. Instead, the probate court continues to check on the trust and its activities throughout its duration. This is to verify that the trustee is managing the trust properly. That supervision continues until the trust’s expiration date, at which point the assets are delivered to the heir and the probate court discontinues its oversight.
Why Would Anyone Choose a Testamentary Trust?
As mentioned previously, the testamentary trust is typically used to pass money to minor heirs who cannot receive it directly. And while the same results can be achieved using certain living trusts, those options are not always as easy to use as the testamentary trust. For example, if your estate is much smaller than the life insurance payout your estate will receive after you die, then you may benefit from using this less expensive trust option.
Who Can Provide the Help You Need?
As with so many other type of estate planning strategies, the use of a testamentary trust is something that should be done in consultation with legal professionals. If your Last Will and Testament is being drafted or reviewed by your estate planning attorney, testamentary trust provisions can be added to the document with little extra effort.
The trusts experts at Biddinger, Bitzer & Estelle, can help you to better understand which type of trust you need for your estate planning efforts, and can ensure that you get the right tools you need to meet your planning goals. We’ll work with you to create a Last Will and Testament that fulfills those objectives, including any testamentary trust or trusts that you need to provide for your loved ones. If you’d like to learn more about how a testamentary trust can assist you with your legacy needs, contact us at our website or call us today at (989) 872-5601 to