A testamentary trust is any trust formed based upon terms contained in the settlor’s last will and testament. A testamentary trust is neither formed nor funded until death and does not exist for legal and tax purposes prior to that time.
An estate planning attorney determines the types of trusts to be used based upon the particular needs and goals of the family. Often an attorney may have several trust options capable of achieving their client’s goals. An attorney sometimes recognizes that a trust may only be needed if certain circumstances occur. As such, rather than form the trust immediately, the person forming the trust can include the terms of the trust in the last will and testament and delay the funding of the trust until the time of their death.
A testamentary trust’s terms can be changed up until the settlor no longer has the ability to change their last will and testament. A person can almost always change their last will and testament so long as they have the mental capacity to do so. Of course, the ability to continue to change a last will and testament and its trusts can also be considered a downside if the person fears they may be subject to undue influence or pressure later in life. In fact, undue influence and pressure by less than scrupulous family or caregivers later in life is a major source of probate litigation.
There are numerous reasons to delay the formation of the trust until the time of death. A benefit of a testamentary trust is that, other than drafting the terms of the trust into your last will and testament, no other actions will usually need to be taken during your lifetime if its assets are to come from your probate estate. If the assets are to come from your probate estate, then the last will and testament will assign the estate’s assets used to fund the trust. If; however, non-probate assets are to fund the trust, such as life insurance, retirement plans, and similar that allow beneficiary designations, then beneficiary designations would need to be made referencing the testamentary trust being formed. In such case, the beneficiary designations would reference the trust, rather than the beneficiary of the trust. You may; however, want to confirm that your life insurance and investment companies are okay with using a testamentary trust as a beneficiary.
Since the trust would not be formed during the person’s life, the trust would not need to be maintained during that period. The trust would not have to engage a trustee, file tax returns, or produce accountings until the trust is formed. As such, the administrative burdens of a testamentary trust can be less substantial.
Additionally, if you are under the estate tax limitation and would rather have your assets receive a step-up in basis at death, then you would not have to fear your trust interfered with that arrangement since the assets were clearly part of your “taxable” estate at the time of your death.
Nonetheless, the primary reason testamentary trusts are used is that the trust may never be needed unless certain things occur. If the trust is, for instance, to preserve assets for your children until they reach a certain age, then the trust will never be needed if you do not pass away until after they reach that age.
The last will and testament will include the trust’s terms and the criteria determining whether the trust is to be formed. For example, the last will and testament may state, “If my son, Jack, is under 30 years of age at the time of my death, then his share of my estate, shall be distributed to the trust for his benefit described in this last will and testament.” In this example, two criteria would need to be satisfied before the trust is formed: first, Jack will need to be entitled to receive something, and, second, Jack will need to be under the stated age of 30. If either is not satisfied, then the trust would likely never be formed.
Lastly, one additional benefit of using a testamentary trust would be the attorney’s fees of drafting and executing a testamentary trust compared to a non-testamentary trust. The trust’s being incorporated into the last will and testament likely reduces some of the attorney’s time involved. As such, your attorney would likely charge less for a trust incorporated into the last will and testament already being drafted, in contrast to creating a separate trust document.
A testamentary trust has many benefits and your attorney may suggest one be used as part of your estate plan. Nonetheless, the facts and circumstances of your family, your estate, and your goals will dictate whether or not one should be used and that decision is, of course, best determined by your estate planning attorney.
For additional information on estate planning, including last wills and testaments and trusts, please contact Jeff Rogyom at (410) 929-4578.
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