Families who wish to set aside assets for investment and distribution to beneficiaries can choose to establish a trust. A trust is simply a legal instrument by which a designated individual, the trustee, holds those assets for the benefit of the beneficiaries. However, there is a simpler way of accomplishing similar objectives, and that is to create a testamentary trust.
There are differences between a trust and a testamentary trust that you need to know about as you develop your personalized estate plan. With the right legal team advising you, however, you can rest assured that your and your family’s interests are being protected. Count on Kallio Law Firm to look out for you.
What Is a Testamentary Trust?
A testamentary trust is a type of trust that is created as part of an individual’s last will and testament. Unlike standard trusts, which typically go into effect right away, the testamentary trust only becomes effective upon the death of the grantor (the person who creates the trust). This is due to the fact that the testamentary trust is included in a will, which itself is only activated upon the person’s death.
Testamentary trusts are also not funded right away, the way that most trusts are, during the grantor’s lifetime. And while a general trust does not have to go through the probate process, a testamentary trust has to because it is included in the will.
Although a last will and testament generally distributes assets to heirs right away after the passing of the decedent, a testamentary trust’s distributions to beneficiaries are somewhat more structured and controlled. The objective is to allow beneficiaries to receive trust distributions at set times or upon set conditions, according to the instructions included in the will. These instructions are intended to explain how the trust should be established and operated after the grantor’s death.
What Are the Benefits of Testamentary Trusts?
You may desire to form a testamentary trust for various reasons and to achieve certain estate planning objectives. These are a few examples:
Control over assets
When estate assets are distributed to someone by way of a last will and testament, the heirs take the property immediately upon completion of the probate process. This is not so with a testamentary trust. The grantor can decide how and under what conditions to structure the distribution of testamentary trust assets to beneficiaries.
There are many ways to restrict assets, for example by not allowing beneficiaries to take them until reaching a certain age and level of financial responsibility.
Tax advantages
Normally, a person who sells a particular asset is required to pay a capital gains tax on the money that is generated by the sale. Using a testamentary trust may help avoid this. When an asset is transferred from the grantor to the beneficiary by means of the testamentary trust, the capital gain can potentially be avoided if it is drafted correctly.
Speak with an experienced estate planning lawyer or tax professional to learn more about this.
Using life insurance proceeds
As mentioned above, a testamentary trust is not funded with the grantor’s assets during their lifetime since it does not come into existence until after the grantor’s death. However, the grantor can choose to fund the testamentary trust with life insurance proceeds.
In order to accomplish this the grantor will need to take the proper steps to designate the testamentary trust as the beneficiary of the life insurance policy. Upon the grantor’s death, the life insurance policy proceeds are paid into the testamentary trust.
Accounting for special needs
Many parents of special needs children want to make sure that anything they leave to their children will not negate their eligibility for government public assistance programs such as Medicaid or Supplemental Security Income (SSI). The provisions of the testamentary trust will need to be carefully drafted in a way that avoids this problem.
A possible alternative is a Medicaid asset protection trust. We can assist with these and other tools that may be able to help.
Spendthrift provisions
Is there someone in your life who you want to support after your death, but you are worried about how they will use the money you give them? This may be a person with an expensive addiction or who has made poor financial decisions. A spendthrift trust is designed to provide funds for these individuals in a controlled way rather than giving them the money all at once.
For instance, the trustee can be authorized to distribute the money to a beneficiary only after that person has proven they are sober for a certain period of time. The money can also be shielded from creditors. A spendthrift trust can be included in a testamentary trust.
Contact Our Ascension Parish & Prairieville Testamentary Trusts Attorney
If you have questions about testamentary trusts, reach out to us. We will start by reviewing your circumstances and whether a testamentary trust will meet your objectives. Next, we can explain the details of how these trusts work and their legal consequences and benefits. Finally, we can help you establish this trust as part of your last will and testament.
Kallio Law Firm is your dependable estate planning advocate. Let us begin working on your testamentary trust and the other aspects of your estate plan today.
