Testamentary Trust: What Is It and Who Needs It?

What is a Testamentary Trust? Who Needs one? What are the benefits? What should I consider and how to get started with a Testamentary Trust?
what is a testamentary trust

Most people don’t like to think about their own mortality. Unfortunately, we all must consider it at some point. In doing so, you may want to consider establishing a testamentary trust.

Testamentary trusts are often created when people die to ensure that the beneficiaries of the trust receive the assets. These trusts are important for ensuring that your wishes are carried out after you’re gone.

Testamentary trusts can also help with estate taxes, probate court costs, and conserving family members’ inheritances.

In this post, we’ll determine what testamentary trusts are, who needs them, and what they offer in terms of benefits.

To learn about other types of trusts, you can explore our complete guide to trusts.

What is Testamentary Trust?

testamentary trust - last will and testament

A testamentary trust is a trust that can be created in accordance with instructions contained in one’s last will and testament. A trustee, who is a third party, has the power to manage assets on behalf of those beneficiaries of the trust. The trust itself does not become effective until a person dies.

In most cases, beneficiaries have no legal right over the assets until they meet certain conditions, such as turning 18. This helps to conserve family members’ inheritance by setting it aside until the conditions specified in the trust are met. Testamentary trusts can also be used for things like charitable donations after a person passes away.

Who Needs a Testamentary Trust?

who needs a testamentary trust?

Many people have testamentary trusts in place for the purpose of providing detailed instructions about how their estate will be distributed after they die. Because the executor is in charge of the trust, it ensures that all the instructions are fully carried out. Testamentary trusts are often created to ensure that the beneficiaries of the trust receive the assets.

Testamentary trusts can also help with estate taxes, probate court costs, and conserving family members’ inheritances. People who need testamentary trusts typically include:

  • Those with large estates that want to reduce their potential inheritance tax liability
  • Those with significant assets that want to protect them from creditors
  • Those with minor children who need protection from possible mismanagement
  • Those who want to keep specific property in the family
  • People who don’t trust themselves or their loved ones to make appropriate decisions on behalf of their beneficiaries after death

The Benefits of a Testamentary Trust

benefits of a testamentary trust

Testamentary trusts have numerous benefits. The primary benefit is that they offer control when it comes to asset distribution after your death. You have the ability to decide who gets what and how resources will be allocated for each beneficiary. Testamentary trusts can also be used to avoid probate court costs, which helps conserve the inheritances.

On top of these benefits, there are also other ways in which testamentary trusts can make life easier for your loved ones after you die:

  • They minimize taxes that beneficiaries might owe on their inheritance
  • They create an asset protection trust for minors
  • They can provide lifetime income to spouses or partners

Considerations for a Testamentary Trust

considerations for a testamentary trust

Testamentary trusts are created as a means to pass on assets after someone dies. Testamentary trusts can be set up ahead of time, but they aren’t actually created until after the death of the person who established it.

As testamentary trusts are often set up to execute the last wishes of the deceased, it’s important that the executor and the beneficiaries understand their responsibilities and benefits. It’s also important to be aware of the downsides of testamentary trusts.

For example, testamentary trusts require a trustee to execute the trust. Depending on who this person is, there may be fees that must be paid. Additionally, the distribution of assets has the potential to cause friction between the beneficiaries. This tends to happen when one or more beneficiaries doesn’t feel that the distribution was fair.

Estate Taxes

An estate tax is a tax assessed on an individual’s estate for the right to transfer property after their death. This is often what prompts people to create testamentary trusts. Testamentary trusts help defer, reduce, or even eliminate the amount of taxes owed by the beneficiary of the trust.

If someone dies with a large estate, they will owe taxes on that estate after their death, before assets are transferred. With a testamentary trust, they can use some of their assets to pay for those taxes before passing them down to the beneficiaries of the trust. If they do not have enough assets in their will to cover those taxes, then they will need to sell other assets from their estate which could reduce the size of the inheritance left behind for beneficiaries.

Additionally, testamentary trusts can help with tax savings by reducing the amount of taxes paid at death through what’s known as “step-up in basis.” The step-up in basis helps eliminate capital gains taxes on assets worth more than $10 million since they are now considered personal property instead of capital assets.

Probate Court Costs

One of the more pressing reasons for establishing a testamentary trust is that it can help with probate court costs.

Probate court refers to the legal process by which an individual’s estate is distributed, including money, property, and other assets. Establishing a testamentary trust allows you to avoid probate court by naming someone in your will who can make decisions about how your estate should be distributed while you are alive rather than waiting until after you die.

By avoiding probate court, you are saving time and money while conserving the assets in the trust.

Faster Asset Distribution

When you die, your estate needs to be finalized. If probate court is involved, this process can take months if not years, depending on the size of your estate. Testamentary trusts are often created to avoid this time-consuming process.

Testamentary trusts allow trustees to leave specific instructions about how their assets are to be distributed, minimizing court time and conserving family members’ inheritances.

Do You Need a Testamentary Trust?

do you need a testamentary trust

So, do you need a testamentary trust? If you want total control and autonomy over your estate, even after you die, then you should establish one. While you can certainly do this yourself, a lawyer or estate planner can make sure everything is correct, nothing is forgotten, and everything is done according to your wishes.

Have another question? Ask an expert.

Our team is here for you. If you have a question about caring for an older adult or other member of your family—be it physical, legal, medical, financial, or anything in between—we’ll have one of our Trusted Advisors get back to you ASAP.

Leave a Reply

Your email address will not be published. Required fields are marked *