Why Might I Want to Create a Testamentary Trust?

Published On - June 8, 2023

Stan Bennett Estate Planning

A comprehensive estate plan typically incorporates a variety of estate planning tools and strategies to make sure that all your estate planning goals and objectives are addressed. One estate planning tool you may decide to include in your estate plan is a testamentary trust. A Murfreesboro estate planning attorney at Bennett | Michael | Hornsby explains why you might want to create a testamentary trust.

What Is a Trust?

A trust is a legal arrangement that allows you (the “Settlor”) to appoint a Trustee to manage and protect assets that are intended to be for the benefit of a third party, such as a child or grandchild. A trust is created using a trust agreement. As the Settlor of the trust, you have the ability to create the trust terms that will be used by the Trustee to administer the trust.

Living vs. Testamentary Trusts

There are two broad categories of trusts: living and testamentary. A living trust is a trust that activates while you are alive whereas a testamentary trust does not become active until after your death. A provision in your Last Will and Testament directs the establishment of a testamentary trust. A living trust can be revocable or irrevocable; however, because a testamentary trust does not activate until after your death, a testamentary trust is always irrevocable once it activates.

Advantages of a Testamentary Trust

Deciding what type of trust you need is the first, and most important, step when creating a trust. The parents or grandparents of minor children often decide to establish a testamentary trust in part because a minor child cannot inherit directly. When the goal is to protect the inheritance of a minor child, there is no need for the trust to be active while the Settlor is alive and, therefore, no reason to incur the expenses associated with administering a trust. In this case, a testamentary trust acts as a safeguard in case something happens to the parent or grandparent while the intended beneficiary is a minor. A testamentary trust can also be a good choice when you want to retain a certain amount of control over how trust assets are used after you are gone but do not need the trust to be active while you are alive. For example, if you have a beneficiary who has an addiction or tends to squander money, transferring that beneficiary’s inheritance into a trust after you are gone is a good way to protect the inheritance.

Are There Disadvantages to Creating a Testamentary Trust?

There are advantages and disadvantages to each type of trust. One important disadvantage that comes with creating a testamentary trust is that the trust assets do not avoid probate. Unlike assets held by a living trust, the assets transferred into a testamentary trust are owned by you at the time of your death. Therefore, they are part of your probate estate. Assets that were already transferred into a living trust, on the other hand, are owned by the trust and, therefore, bypass probate. Because the assets are part of your probate estate, they may take longer to be transferred into the trust and be available for distribution than assets held by a living trust. In addition, because these assets are part of your estate at the time of your death, they may impact the amount of federal gift and estate taxes owed by your estate. Finally, while you can always revoke or amend your Will while you are alive, including the provision that creates a testamentary trust, once you are gone the testamentary trust you created is irrevocable.

Contact a Murfreesboro Estate Planning Attorney 

If you have additional questions or concerns regarding the inclusion of a testamentary trust in your estate plan, consult with an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.

 

Stan Bennett
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