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10 Things You Should Know About A Testamentary Trust

Understanding Testamentary Trusts

A testamentary trust is a type of trust that is created within a person’s last will and testament. It allows the trust creator (also called the grantor or settlor) to put conditions around how their assets will be distributed after they pass away. Testamentary trusts can be useful estate planning tools for managing an inheritance for beneficiaries who may need extra support or protection.

How Testamentary Trusts Work

A testamentary trust springs into existence when the grantor dies and their will is entered into probate. At that point, the terms of the trust will dictate how the trust assets should be managed and distributed to the beneficiaries.The grantor names a trustee to manage the assets in the trust. This could be a friend, family member, professional advisor, or a corporate trustee like a bank or trust company. The trustee has a fiduciary duty to manage the assets in the best interests of the beneficiaries.The grantor also specifies the beneficiaries in the trust – these are the people or organizations that will receive income and/or principal from the trust at some point. Beneficiaries can include spouses, children, grandchildren, charities, etc. The grantor can even name themselves as a beneficiary.The distribution instructions in the trust provide details around when and how beneficiaries will receive the assets. For example, a trust might distribute income to a beneficiary every year for 10 years, and then distribute half the principal when they reach a certain age. The grantor has flexibility to design distribution instructions that suit their wishes.

Key Benefits of Testamentary Trusts

There are several reasons why someone may want to use a testamentary trust as part of their estate plan:

• Control over inheritance: Testamentary trusts allow grantors to place conditions on an inheritance, even after their death. This helps ensure the assets are used responsibly by beneficiaries.
• Protection from creditors/divorce: Trust assets may have better protection from a beneficiary’s creditors or ex-spouses than assets distributed outright. This can provide security for beneficiaries.
• Tax minimization: Trusts can help minimize estate taxes thanks to tax rules that treat trusts differently than outright inheritances. This may allow more wealth to pass tax-free to beneficiaries.
• Support for minors/special needs: Trusts can provide structure to manage an inheritance for a beneficiary who is a minor, has special needs, or may be unable to responsibly manage money on their own.

Common Types of Testamentary Trusts

There are a few common types of testamentary trusts that people often establish as part of their wills:

Minor’s Trust

This is designed to hold and manage assets for minor beneficiaries until they reach the age at which the grantor feels they can handle an outright inheritance. It allows a trustee to make distributions for health, education, and support needs until the beneficiary comes of age.

Lifetime Trust

This allows grantors to provide ongoing income distributions to a surviving spouse or other beneficiary for the rest of their life. It may also allow access to principal under certain circumstances, at the trustee‘s discretion.

Special Needs Trust

This is tailored specifically to provide supplemental needs for a beneficiary with special needs while allowing them to maintain eligibility for certain government benefits. An experienced special needs attorney can help craft appropriate language.

Charitable Trust

This type of trust makes distributions to charities over time, allowing grantors to further support causes they cared about during life. Charitable trusts can also help minimize estate taxes.

How to Set Up a Testamentary Trust

If you decide a testamentary trust could be helpful for your situation, here is an overview of what’s involved:

• Hire an estate planning attorney to draft trust language within your will. Get professional advice to ensure your trust meets all legal requirements in your state.
• Name one or more trustees to manage the trust assets and distributions after you pass away. Choose someone you trust who is responsible and capable.
• Indicate the beneficiaries, distribution instructions, and termination conditions to carry out your wishes. Be as clear as possible about how you want assets distributed.
• Fund the trust by naming certain assets like property, investments, or life insurance to be transferred to the trust upon your death.
• Store the original will in a safe place known to your family/executor and provide copies to trustees/beneficiaries so they can fulfill their duties later on.
• Update the will as needed over time if relationships, assets, or wishes change.

It’s advisable to work with an estate planning lawyer to properly set up a testamentary trust. While it requires some time and expense upfront, it can really pay off by keeping inheritance protected and distributed responsibly to your beneficiaries.

Frequently Asked Questions

**Can you revoke a testamentary trust?**Yes, as long as you are still living and competent, you can make changes to any trusts established in your will or revoke it entirely. Your will only becomes irrevocable upon your death.

When would a testamentary trust terminate?Testamentary trusts usually include termination conditions, such as when a beneficiary reaches a certain age or after a period of years has passed. The grantor defines termination clauses when establishing the trust.

**What happens if no trustees are named in a testamentary trust?**If a testamentary trust has no trustee by the time assets are funding the trust, the court can appoint a trustee to manage the trust. Trustees have legal duties, so it’s better for the grantor to choose trustees in advance.

**Can you challenge a testamentary trust?**Yes, trust beneficiaries can challenge a testamentary trust by filing a lawsuit. It’s not common but might occur if beneficiaries believe the grantor lacked mental capacity when creating the trust or was unduly influenced by another party.

**Who pays taxes on a testamentary trust inheritance?**In most cases, the beneficiaries of the trust pay applicable taxes on any income or distributions they receive from testamentary trust assets each year.

Working With an Estate Planning Attorney

While testamentary trusts can provide substantial benefits as part of an estate plan, they require careful drafting and compliance with your state‘s trust laws and regulations. That’s why it‘s strongly recommended to work with an experienced estate planning attorney if you want to establish a testamentary trust.Here are some tips for finding a qualified estate planning lawyer to assist you:

• Get referrals from financial advisors, accountants, or friends/family who have had positive experiences.

• Check credentials like Juris Doctor (J.D.) and certification in estate planning/trust law.

• Look for membership in estate attorney associations or the National Elder Law Foundation.
• Read reviews online and meet with a few lawyers before deciding.

• Ask questions to understand their experience with testamentary trusts specifically.
• Compare fees charged by different attorneys and firms. Costs will vary.