Five Things You Should Know About a Testamentary Trust
1. What is a Testamentary Trust?
A testamentary trust is a trust created within a will that does not come into existence until after the individual who wrote the will (the testator) passes away. This type of trust is different from a living trust because the trust does not exist during the testator’s lifetime. There are five main things you should know about a testamentary trust before creating this account.
2. What are Some Benefits of Implementing a Testamentary Trust?
One benefit of a testamentary trust is that it controls when and how a beneficiary will receive assets under the trust. For example, a testamentary trust may provide that the testator’s son should not receive his one million dollars ($1,000,000) inheritance until he reaches twenty-five (25) years old. If the testator dies when his son is twenty (20), the testator won’t have to worry about his son spending his inheritance before an age where the testator feels his son will maturely handle the bequest. The instructions governing the trust may allow the trustee to distribute money to his son before he reaches twenty-five if the money will be used for a stated purpose under the trust agreement (for example, if it is for his health, support, maintenance, or education).
This ensures that his son will still get the benefits of his inheritance for a purpose that the testator would want him to use it on. Alternatively, the instructions governing the trust may allow the trustee to distribute the income from the trust (or a certain portion of the trust) to the son intermittently (monthly, quarterly, yearly ex.). This ensures that the son will enjoy a portion, but not all, of his inheritance.
The second benefit of a testamentary trust results from the ease of making changes to the terms of a will. Since the testamentary trust does not come into existence until after the testator dies, the testator does not need to re-title assets in the trust’s name during their life. Therefore, once you amend a will creating a testamentary trust, the testator does not need to worry about whether they need to re-title their assets from their latest changes to his will.
Testamentary trusts may also protect the testator’s money from creditors and have income tax benefits. It is necessary to contact an experienced estate planning attorney to discuss how a testamentary trust may benefit you.
3. What are The Disadvantages of a Testamentary Trust?
One disadvantage of establishing a testamentary trust is that the trust property must go through probate before the trust can commence. Furthermore, these trusts are usually subject to the continuing jurisdiction of the probate court. This means that the probate court retains subject matter jurisdiction over the proceedings of the trust, and the trust is subject to continuous court supervision. Probate courts often supervise the trust by requiring periodic accountings on the operation of the trust. Therefore, there is a second disadvantage of these trusts. The disadvantage is that the trustee’s fees are usually much higher than other types of trust agreements.
Another disadvantage of a testamentary trust is that the terms of the trust are a matter of public record. This trust has this characteristic since they are in the body of the will. Clients may find this disadvantageous because it becomes a matter of public record when money is going to be distributed. For example, an individual may find out that Johnny, a college student, is going to inherit one million dollars. Although this will not occur until he successfully graduates college, families do not want people trying to take this money. Families often wish to keep this type of information private.
Furthermore, testamentary trusts may be burdensome if the testator becomes incapacitated. These trusts do not come into existence until after the testator passes. As such, no one will be managing the assets of the trust when the testator becomes incapacitated. The terms of the trust are limited to how the money should be managed when the testator dies. Out of the five things you should know about a testamentary trust, understanding the cons will help you decide if this type of trust is right for your family.
4. What is The Role of a Trustee Under a Testamentary Trust?
The role of a trustee under a testamentary trust is to manage assets. While the trustee has some obligation to act on the wishes of the benefactor, they are not legally required to follow everything wish. Thus, it is imperative that you select someone who you are confidant in to be your trustee. To best protect your assets, you should name a secondary trustee incase your primary trustee is not available or does not want to take on this role.
5. What is The Probate Courts Role in a Testamentary Trust?
Once the benefactor of the trust passes away, the probate court will periodically check out the trust. The court takes this action to ensure that the assets located in the trust are being distributed and used in accordance with the benefactor’s wishes. However, the probate court charges the trust for the check-ups so legal fees can add up over time. If you are considering distributing your assets to family, friends, or charities over a long period of time, you should take the cost of these fees into account.
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For more information related to five things you should know about a testamentary trust, please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.