Testamentary Trust and Mistakes You Should Avoid

A testamentary trust is a legal trust that is created through precise instructions laid out in a deceased person’s Will. A testamentary trust is irrevocable and goes into effect at an individual’s death. In other words, when this individual dies they will no longer be able to change the terms of their Will. However, a testamentary trust is revocable during a person’s lifetime because it technically doesn’t actually exist yet.

A proper Will, and therefore a testamentary trust, is something that is seemingly under-utilized estate planning tool in America. According to a survey by Harris Poll (https://www.usatoday.com/story/money/personalfinance/2015/07/11/estate-plan-will/71270548/), about 2/3rds of Americans do not have a Will.

A Will may contain several testamentary trusts for various beneficiaries and may address all or any portion of the individual’s estate. For example, a testamentary trust can be created for the benefit of a spouse, for children, or for a disabled relative. A testamentary trust can be used to structure how the grantor wants his/her property distributed, just like a will but with these trusts, one can distribute the payments from the trust over a period of time rather than transferring the money in one lump payment. This is particularly useful when giving the property to minor children and beneficiaries with disabilities. These trusts, under certain circumstances, can provide tax advantages when setting up correctly.

Issues to consider in your trust document:

 

 1. Trust Creation

If you make errors during the trust creation process, it is possible your trust either won’t be considered legally valid or will not work in the way that you expected it to work. You should get help from a professional trust advisor to follow all rules for trust creation so there is no question that you followed the law and made a trust that will achieve your goals.

2. Choosing the Proper Trustee

Like all other trusts, a testamentary trust assigns a trustee to manage the distribution of the trust’s assets. While sometimes the distribution method will be left to the discretion of the trustee, the trust often will carry specific instructions. The settlor must take care to choose a trustee who is knowledgeable and trustworthy because they have a significant degree of control as to how the trust property is used.

The trustee to a testamentary trust must act as a trustee until the trust ends. Since some people will not wish to or be able to take this time-consuming role, the settlor should choose a backup trustee to avoid the court from having to appoint one. It is advisable for the settlor to talk to his or her desired trustee before making the choice.

 

A testamentary trust may be a better solution for smaller, less complex, estates. For larger estates, it is best to consult with an estate planning professional to determine which measures may be best for the individual’s personal situation and financial goals.

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