What Is A Testamentary Trust And When Should You Use One?

A testamentary trust is created through your will and only comes into existence after you die. Unlike a living trust that operates during your lifetime, this type of trust springs to life when your will goes through probate. The trust provisions are written directly into your will, instructing how certain assets should be managed and distributed over time.

Our friends at Lai & Turner Law Firm PLLC across the country discuss testamentary trusts as valuable tools for families with specific needs. A probate lawyer can help determine whether including one in your will makes sense based on your beneficiaries and goals. The flexibility these trusts offer makes them worth considering in many situations.

Think of a testamentary trust as a set of instructions that activates after your death. Your executor first settles your estate through probate. Then, specific assets transfer into the trust according to your will’s directions. A trustee you’ve named manages those assets for your beneficiaries under the terms you’ve established.

How Testamentary Trusts Work

The process starts with probate. Your will gets submitted to court, validated, and your executor pays debts and taxes. Once these obligations are settled, assets designated for the testamentary trust get transferred into it. The trustee then manages them according to your instructions.

You control several important aspects when creating a testamentary trust:

• Who serves as trustee to manage the assets
• Which beneficiaries receive distributions and when
• How funds can be spent (education, health, maintenance)
• What age beneficiaries gain full control
• Whether the trust continues for a beneficiary’s lifetime
• Distribution schedules and conditions

The trustee has a fiduciary duty to manage assets prudently and follow your instructions. They invest funds, make distributions, keep records, and file tax returns for the trust. This ongoing management continues until the trust terminates according to your terms.

Common Uses For Testamentary Trusts

Providing For Minor Children

Parents often use testamentary trusts to protect inheritances for young children. Instead of an 18-year-old receiving a large sum outright, the trust holds and manages those funds. The trustee can distribute money for education, healthcare, and living expenses while preserving the principal until the child reaches a more mature age.

You might specify that your child receives one-third at age 25, another third at 30, and the remainder at 35. This staged approach helps prevent a young adult from making poor financial decisions with a substantial inheritance all at once.

Supporting Beneficiaries With Special Needs

Special needs testamentary trusts provide for disabled beneficiaries without disqualifying them from government benefits. According to the Social Security Administration, certain properly structured trusts can supplement public benefits rather than replacing them. The trustee uses trust funds for expenses not covered by government programs.

These trusts require careful drafting to comply with Medicaid and Supplemental Security Income rules. The trust must be supplemental in nature, and distributions need to avoid counting as income or resources for benefit eligibility purposes.

Managing Assets For Spendthrift Beneficiaries

Some beneficiaries struggle with money management due to addiction, gambling problems, poor financial judgment, or vulnerability to manipulation. A testamentary trust with spendthrift provisions protects the inheritance from both the beneficiary’s own impulses and outside creditors.

The trustee has discretion over distributions, providing for the beneficiary’s needs while preventing waste. This structure offers protection you can’t achieve with an outright inheritance.

Protecting Assets In Blended Families

Second marriages create competing interests between a surviving spouse and children from a previous relationship. A testamentary trust can provide income to your surviving spouse during their lifetime while preserving the principal for your children. This balances support for your spouse with inheritance goals for your children.

Advantages Of Testamentary Trusts

Testamentary trusts cost less to establish than living trusts. You’re simply adding provisions to your will rather than creating and funding a separate trust during your lifetime. There’s no need to retitle assets or maintain a trust while you’re alive.

These trusts offer flexibility you don’t need until death. You can change the terms anytime by updating your will. This adaptability helps as circumstances evolve and family situations change over the years.

Professional management continues after you’re gone. Your chosen trustee handles investments, distributions, and record-keeping according to your instructions. This ongoing oversight protects beneficiaries who need help managing assets.

Drawbacks To Consider

Testamentary trusts don’t avoid probate. Your entire estate goes through the court process before the trust gets funded. This means delays, court costs, and public records that living trusts can avoid.

These trusts require annual tax returns and ongoing administrative work. The trustee must keep detailed records, file IRS Form 1041, and document all transactions. Professional trustees charge fees for these services, reducing the assets available for beneficiaries.

Trust income faces different tax treatment than individual income. Trusts reach the highest tax brackets much faster than individuals. According to IRS tax rate schedules, trust income above relatively modest thresholds gets taxed at the top rate, potentially reducing the benefit to beneficiaries.

Key Differences From Living Trusts

Living trusts operate during your lifetime and can avoid probate entirely. Testamentary trusts only exist after death and require probate first. Living trusts help with incapacity planning. Testamentary trusts don’t.

You fund a living trust by transferring assets into it while alive. Testamentary trusts get funded through your will after death. Living trusts remain private documents. Testamentary trusts become part of public probate records since they’re in your will.

The choice between them depends on your priorities. If avoiding probate matters most, a living trust makes sense. If you want simpler lifetime administration and don’t mind probate, a testamentary trust might work better.

Making The Right Choice

The decision to include a testamentary trust in your will depends on your beneficiaries’ circumstances and your goals. Young children, beneficiaries with special needs, spendthrift concerns, or blended family dynamics all suggest these trusts deserve consideration.

Consider the size of your estate too. Smaller estates might not justify the ongoing administrative costs and complexity of trust management. Larger estates often benefit from the control and protection testamentary trusts provide.

We encourage you to think carefully about who will inherit your assets and whether they need ongoing management after your death. A testamentary trust offers structure and protection that simple outright bequests cannot provide. Taking time to evaluate your family’s specific needs helps you create a plan that protects your legacy and supports the people who matter most to you.

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