Some people don’t want to leave their heirs with free access to the wealth they’ve accumulated, and some want to limit when or how money is used.
Others would like to protect an inheritance from being attacked by creditors or diverted away from children by a second wife or husband.
US News’ recent article entitled “What Is a Testamentary Trust and How Do I Create One?” says that a testamentary trust can be a great estate planning tool in all these situations.
Trusts are created to hold assets. Money in a trust is managed according to the wishes of the person who created it. A testamentary trust is made in a will; that trust doesn’t exist until after a person dies and a probate court has validated the will.
When the trust has been created, a person’s assets are placed into it and then distributed as designated by its instructions.
Also known as a revocable trust, a living trust is created before a person’s death. A revocable trust is created outside of probate, so heirs don’t have to go through the court system to inherit assets from a living trust. The trustee can distribute funds directly to beneficiaries.
Both testamentary trusts and living trusts are used for estate planning. However, a living trust is more flexible because living trusts are created outside probate and managed outside the court system. Testamentary trusts are administered through probate for as long as they are in effect.
A testamentary trust is often used to manage money for minor children. However, it can also protect assets in other situations, such as if you’re worried that your adult child might get divorced and don’t want the inheritance split in the proceedings. A trust may be one way to do that.
Some websites have templates to create trust documents. However, the issue is that people don’t understand all the ins and outs of how these documents work. If assets are titled wrong, they might be excluded from the trust.
That would defeat the whole purpose of creating one. Do-it-yourself forms could also be more likely to face legal challenges.
The testamentary trust doesn’t go into effect until the person dies. The testamentary trust will then be created, and assets will be transferred into it as stated in your will. Distributions subsequently happen from the trust as dictated by you.
Reference: US News (June 14, 2022) “What Is a Testamentary Trust and How Do I Create One?”