Testamentary Trust 101

July 28, 2021

According to the American Association of Retired Persons, in 2017, over 70% of young adults between the ages of 18 and 36 did not have a Last Will and Testament in place. Creating an estate plan that best serves the creators, as well as the beneficiaries, can be confusing and overwhelming. Additionally, millennials, especially young parents, do not want to think about their death and leaving their children. However, it is important to understand that it is better to have a plan in place, rather than no plan. One way to provide for children throughout their lifetime is by setting up a testamentary trust.

While most testamentary trusts are easy to set up and do not require an extensive estate plan, it is important that its creators understand all legal aspects of these types of trusts. Some of these aspects may include how they are executed, their financial and legal benefits, and what factors to consider when considering a testamentary trust over other estate planning options. An experienced estate planning attorney at Johnson Law Group at (720) 463-4333, can explain all aspects of the testamentary trust and how it can keep your family and estate protected.

How Does a Testamentary Trust Work

A trust is a legal entity that allows you to transfer your assets to future heirs. A testamentary trust is set up within a Last Will and Testament (will), therefore it is simple and less expensive to set up, compared to an inter-vivos trust. Within the will, the creator can include instructions on how the trust should be established, what assets should go into the trust, as well as naming the trustee and beneficiaries.

Benefits of Testamentary Trust

The major benefit of a testamentary trust applies to parents with young children. These parents might not have a big enough estate yet to want to set up more complex estate planning, such as an inter-vivos trust, but they do want to create a trust for their children’s benefit, to ensure that their assets are being protected. A testamentary trust will create that protection, since it is up to the parents to decide who should look over the assets until the children receive their distributions. Not only will this protect the assets for children that may not be responsible enough yet to make financial decisions for themselves, but it will also protect the assets against potential legal actions against the beneficiary.

There is also no limit on how many trusts or beneficiaries can be included in a person’s will. Therefore, parents can create separate trusts for each of their children, to keep each child’s share separate from the beginning. There are some great benefits to creating a testamentary trust, and visiting with an experienced attorney at Johnson Law Group can help you make the right decision for your unique set of facts and circumstances.

Considerations When Setting up a Testamentary Trust

Because the testamentary trust is created within a Last Will and Testament, it goes into effect only after the testator (the party creating the will) passes away. Therefore, the terms, instructions, assets, and trustees within a testamentary trust can be modified as many times as the testator wants during his or her lifetime. During the testator’s lifetime, the trust only exists on paper of the Last Will and Testament and therefore, changes to that will may affect the trust. Only after the testator passes away and the will is put in the probate process, the trust becomes irrevocable and cannot be changed.

Since a testamentary trust is part of a Last Will and Testament and therefore, the assets are not transferred into it until the will is probated, a testamentary trust will not avoid probate.

Choosing a Trustee

One of the most important parts of creating any estate plan is choosing a trustee. A trustee is a person that is responsible for creating and handling the trust until all the assets are distributed to the beneficiaries. The trustee may be responsible for making distributions to the beneficiaries for a number of years in order to provide for their well-being, health, or education. The trustee may also be allowed to make certain changes to the terms of the trust that were initially set in the Last Will and Testament. Because a trustee is a party who will have the most control over the assets in the testamentary trust, it is crucial to choose a person that a testator believes will work in the best interest of the beneficiary.

Testators may also consider appointing co-trustees, which are usually no more than two people who work together on making the decisions. In these cases, the approval of both trustees is necessary in order to make distributions. This can obviously cause some issues if the parties do not work well together. Therefore, a testator must pick a trustee (or trustees) carefully, taking into consideration the relationship between the potential co-trustees, the best interest of the beneficiaries, as well as the relationship between the beneficiary and all trustees involved.

Testamentary Trusts and Financial Considerations

While a testamentary trust will provide asset protection for the beneficiaries by keeping it safe from creditors, it does not provide such protection for the testator. A testamentary trust will not prevent creditors from pursuing assets from the testator’s estate once the will is in the probate process.

If you are considering a testamentary trust, it is also important to consider visiting with an experienced estate planning attorney from Johnson Law Group to discuss Internal Revenue Service (IRS) tax benefits and drawbacks related to testamentary trusts.

Learn about Testamentary Trusts From an Experienced Attorney

There are many different options as you move forward with your estate planning decisions. If you are considering a testamentary trust as part of your estate planning, call the compassionate and experienced estate planning attorneys at Johnson Law Group at (720) 463-4333, who can explain the legal and financial aspects of a testamentary trust and how it may benefit your estate plan.

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