Estate Planning Attorneys Explain the Benefits of Testamentary Trusts

You may be familiar with the many different types of trusts available to use in your estate plan. One of those trusts, the testamentary trust, is the type of trust that only goes into effect after your death. A testamentary trust is really the opposite of a living trust, which becomes effective when you create it and continues to operate during your lifetime. If you are considering which type of trust to use our estate planning attorneys can answer questions and help you make the right choice.

How does a trust basically work?

A trust is basically a legal document that tells people how you want your property and assets distributed after your death. Unlike a Will, Trusts allow you to transfer your property into the trust, so that the property can then be transferred to the beneficiaries, you have chosen, after your death. One of the general benefits of a trust is that the property included in the trust will not need to go through probate to be distributed to your beneficiaries. That saves time and money.

What makes a testamentary trust different?

A testamentary trust is a special type of trust that you can include in your last will and testament. Like any other trust, it provides for the distribution of all or a portion of your estate to the beneficiaries you select. Many people include the proceeds from a life insurance policy in their testamentary trusts, especially if the insurance policy will give a large sum of money to a minor or young adult. Another option is including more than one testamentary trust in the terms of your last will and testament.

How are a revocable living trust and a testamentary trust different?

A revocable living trust goes into effect once the trust agreement has been signed and notarized and the trust property is actually funded, or transferred, into the trust.  These trusts are called “living” trusts or “inter vivos” trusts because they become effectively immediately, while you are still alive. On the other hand, a testamentary trust does not go into effect until after your death and then becomes irrevocable. If a trust is irrevocable, it cannot be changed or terminated. Yet, because the trust does not become effective until after death, you are allowed to modify the terms of the trust agreement, at any time, during your lifetime. Our estate planning attorneys can help you decide which one you need.

How does a testamentary trust work?

A testamentary trust becomes effective once probate administration is complete. The trust will not expire or terminate, until the time designated by the trust agreement. Trusts that are established for minors usually expire once the child reaches the age of majority or when some other condition is met – like graduation from college or marriage. Our estate planning attorneys can help you make sure that the terms of your testamentary trust agreement will accomplish your goals.

The need for a trust declaration

For both a revocable living trust and a testamentary trust, when you create the trust declaration, you name a successor trustee to handle any administration tasks, after you are gone, and you also name successor beneficiaries. After you pass away, the successor trustee would follow instructions that you leave behind in the trust declaration. Assets that have been conveyed into the trust would be passed along to the beneficiaries in accordance with your wishes.

A revocable living trust allows for probate avoidance

When you create the trust agreement, you name a successor trustee to take over the trust administration after you pass away, and you name successor beneficiaries. After your passing, the trustee would follow instructions that you leave behind. The distributions from a revocable living trust would not be subject to the probate process. Revocable living trusts facilitate probate avoidance, and this is why they are so popular. With a testamentary trust, the trust would only be activated after the probate process is complete. Assets usually governed by a testamentary trust are not available to the person setting up the trust prior to their death. For example, you can use a testamentary trust to outline how you want a large life insurance policy distributed. You do not have the money from a life insurance policy until after your death.

Why should I choose a testamentary trust?

In some situations, testamentary trusts will be the best choice, particularly if you have a small estate compared to the life insurance proceeds distributed to your estate after your death.  Another advantage is that the fees for establishing a testamentary trust are typically inexpensive as they are included in the fees for preparing your last will and testament and other estate planning instruments.

Join us for a free seminar today! If you have questions regarding living trusts or any other estate planning matters, please contact the experienced attorneys at The Potter Law Firm for a consultation. You can contact us either online or by calling us at (704) 944-3245 or for individuals in Kentucky at (606) 324-5516 (Ashland, KY) or at (859) 372-6655 (Florence, KY).