Estate Planning Essentials: The Testamentary Trust

For many people who first begin to consider their estate planning options, the words “living trust” can sometimes be a source of confusion – primarily because the other main type of trust receives only scant attention. In fact, some people just think that the living trust is the only fundamental type of trust out there, and that the only real differences between trusts are their ability to be revoked and the purposes for which they are designed. The fact is, the living trust has a counterpart: the testamentary trust. Before you make any decisions about the inclusion of trusts in your estate plan, it’s important to learn a little bit about this type of trust too.

What is a Testamentary Trust?

The testamentary trust is a trust that people place within the Last Will and Testament. Like the living trust, it is designed to provide a mechanism for distributing estate assets to heirs when the decedent passes away, and can contain all the estate assets or just a part of those assets. It is also sometimes used to hold life insurance proceeds that are paid out by the insurer when the trust grantor dies. Since these trusts are typically created as a way to take care of minor children or loved ones with special needs, there are sometimes multiple testamentary trusts contained within a single will.

Testamentary trusts are provided as part of your will. You select a trustee who is responsible for overseeing the trust once it goes into effect and protecting the assets until the named beneficiary is ready to take control of the inheritance. When minors are involved, there is typically an age condition established in the trust terms that defines when the child receives the assets. With special needs heirs, the trust terms may be even more restrictive to ensure that the heir doesn’t receive a large windfall that might cause benefit eligibility concerns.

On the surface, that might sound like your everyday, average living will – except for its inclusion within your will. In terms of what it can be used for, the options certainly seem to mirror the living will in many respects. However, there are some fundamental differences that should be understood as well.

How it Differs from a Living Trust

Living trusts are referred to in that manner because they are created and exist during the lifetime of the trustor. In every sense that matters, the testamentary trust doesn’t exist until you die. In fact, the trust itself doesn’t even go into effect until the probate process is complete. Obviously, that means that it fails to provide one of the most important benefits that many people seek when they include living trusts in their estate plans: probate avoidance.

Moreover, depending upon how long your trust is designed to last, the probate court could have ongoing interest in the trust’s management. If, for example, you have a six-year-old child for whom you’ve created a testamentary trust, and you’ve designed the trust to last until that child turns twenty-one, then the probate court could be checking up on the trust for that entire fifteen-year period. That can create some additional court fees that need to be considered when you design the trust.

In addition, the testamentary trust lacks the flexibility that is typically found in most living trusts, particularly when it comes to the purposes for which it can be used. It is obviously not useful for things like Medicaid planning, estate tax avoidance, or similar strategies. And again, it does not help your heirs avoid probate, and can leave part of your estate subject to court interference and monitoring for years after probate has basically been concluded.

Are There Any Benefits?

Though it might at first glance seem as though there is little reason to choose this type of trust for your estate plan, there are some very real benefits that it can provide in certain cases. One of the most important of these benefits involves cost. Whereas living trusts can involve considerable expense in some instances, the testamentary trust is a relatively inexpensive option and can easily be included during the preparation of your Last Will and Testament.

These cost benefits can be important, especially for those whose estates are relatively moderate, or where the life insurance policy proceeds far outweigh the total value of the assets. Since estate planning can represent an ongoing expense due to the need to update trust terms and other components of the plan over time, the testamentary trust can allow people of more modest means to enjoy the protections that a trust can offer without enduring the greater costs that can be accrued when setting up a typical living trust.

Weighing the Benefits and Limitations

Naturally, the choice that’s right for you will depend entirely upon your current circumstances, future needs, and goals. If you have complex needs and expect to need more targeted planning in the future, then you may need to rely upon living wills that are either revocable or irrevocable. Medicaid planning and similar strategic efforts are simply beyond the capabilities of this trust type. If, however, your estate is small enough that a living trust isn’t necessary, then the testamentary trust can allow you to enjoy some of the same benefits without the expense.

At Fouts Law Group, LLC, we always want to make sure that you have the estate planning tools that meet your unique needs. To accomplish that goal, we’ll work with you to review your circumstances and goals, and help you evaluate which options are right for you. If you’ve considered the inclusion of a trust in your estate planning but always believed that your estate wasn’t large enough to justify the time or expense involved in creating and managing a living trust, then the testamentary trust option could be just the solution you’ve been looking for. To find out more about these trusts and learn how they could benefit you, contact us online or give us a call at (678) 242-8344.