There are many different reasons to consider using trusts as part of your estate planning. But, which type of trust should you consider? As trusts have become more popular in recent years, much of that increased attention has focused on the living trust – either the revocable trust or the irrevocable trust. What many don’t realize is that there is another type of trust that is not considered to be living, since it is not active during the grantor’s lifetime. That trust is known as the testamentary trust, and it only “lives” after you die. And while you might not have heard of it before, there are some instances in which it might be the perfect trust vehicle for your estate planning needs.
What makes a trust a Testamentary Trust?
A testamentary trust is a special kind of trust that is typically contained as a provision within a will. In effect, it is a dormant trust that remains inactive within your will until you pass away. That makes it unlike a living will that goes into effect as soon as it is created and signed. Once the testamentary trust becomes active at your death, it becomes irrevocable. Prior to that, however, it can be amended right up until the moment of your death, since it is just another provision in your will.
What are the advantages of using a Testamentary Trust?
Like many other important estate planning tools, testamentary trusts can provide a variety of different benefits when you’re trying to plan an inheritance for your children.The law doesn’t allow you to gift assets directly to minors in your will under ordinary circumstances. If you use one of these trusts in the will, however, you can leave your children inheritances and name someone you trust to serve as the trustee responsible for managing that gift.The testamentary trust can also be a useful vehicle for parents to leave a group trust to their children.
The trustee of a testamentary trust manages the inheritance until your child reaches the legal age at which he or she can take possession of the assets. You get to determine that age, which means that you have a great deal of latitude when it comes to setting conditions for receipt of the inheritance. Usually, people arrange the terms of the trust so that children receive control at some point between the ages of 18 and 25. Testamentary trusts are also less expensive than many other trust types since the trust is created using provisions in your will.
Why should I consider using a Testamentary Trust?
There are some general guidelines that can help you to know when a testamentary trust might be right for you. A testamentary trust provides flexibility with respect to the trustee. You can name virtually anyone to serve as trustee – though you should still consider the selection carefully to ensure that it’s someone you trust. This type of trust can be more advantageous for tax purposes than options like the family trust. The family trust can cause minors who receive distributions to incur penalty taxes when their distributions exceed $1100. Minors receiving distributions from a testamentary trust can receive as much as $10,000 annually without any tax liability. Amounts exceeding that limit are simply taxes as adult income.
Testamentary trusts can provide asset protection
If one of your goals is to protect inheritances from creditors, then a testamentary trust is a good choice. Since the testamentary trust is irrevocable and not under the control of the beneficiary, it can help to shield an heir’s inheritance from creditor actions. The testamentary trust can also be used for special needs heirs, in much the same way that a standard Special Needs Trust would be utilized. Since the trustee retains control over the assets in the trust, the gift won’t impact your heir’s important government benefits.
What are the disadvantages of a testamentary trust?
As with most things, there are certain disadvantages to using these trusts. For one, your named trustee may decline the job once you die. If that happens, then the court will select someone to serve in that role, and it could be someone who doesn’t have your heirs’ best interests at heart. Testamentary trusts can also be more expensive to maintain than living trusts. This is due to the way that probate courts maintain interaction with the trust after you die. Those courts routinely summon trustees to account for their management of the trust. While this is done to protect the heirs from trustee mismanagement, it is done at the trust’s expense. And since some trusts are maintained for many years, those expenses can consume a sizable portion of the trust and reduce the inheritance available for those heirs. Since the testamentary trust is in the will, it won’t help your estate escape probate. Remember, the trust can only be activated when you die – and probate is needed to activate the provisions of the will.
Attend a FREE seminar today! If you have questions regarding a testamentary trust, or any other estate planning matters, contact the Law Offices of Mary A. Miller, P.C., for a consultation either online or by calling us at (914) 939-6565.