What Is a Testamentary Trust?

AUTHORS(s):

Founder & Attorney

Nicholas Medley

Nicholas started Medley Law to focus on building a lasting relationship with clients while still providing quality advice and services to fit their individual situations. His focus in on the specific practice areas of estate planning, special needs planning, Medicaid planning and applications, and probate estates.

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Estate planning involves a variety of documents to ensure your loved ones are cared for upon your death or when you’re no longer to make medical and financial decisions independently. One term you’ll undoubtedly hear come up repeatedly is “trust,” which is a legal arrangement to divvy out finances and other assets. However, there are several subcategories to familiarize yourself with, including the concept of a testamentary trust.

Here’s everything to know about this document and whether it’s the right choice for you.

What Is a Testamentary Trust?

A testamentary trust is a legal document that’s part of the person’s will. It determines who receives what assets upon the individual’s death, outlining who is considered a beneficiary. It only takes effect upon a person’s death, differentiating itself from a living trust that’s viable even when the person is still alive.

Who Should Use a Testamentary Trust?

As you’re prepping your last will and testament, it’s a good time to also consider establishing a testamentary trust. Many people from all walks of life stand to benefit from the terms of the trust, and while it’s not inherently a good idea for every single person, you should consider it if you fall into one of the following categories.

  • Someone who has minor children to provide for: This type of trust is great for parents with children who aren’t 18 yet. They may want to give assets to them once they’re adults but want to be protected in case they pass away before then.
  • Someone who has a complex estate: People who own numerous properties or have a lot of trust assets will want to avoid any disputes upon their death. A trust with conditions laid out in a will simplifies everything so that there are no lingering questions among the beneficiaries after death.
  • Someone worried about a beneficiary managing finances: A trust is great for people who want conditions laid out on the assets beneficiaries receive. A person in the family may struggle managing finances or could have a history of drug abuse where the testator doesn’t want them to have a ton of money at once. A trust ensures money only goes out if certain conditions are met.
  • Someone who wants to reduce estate taxes: The estate planning process can bring with it many tax woes. Testamentary trusts can reduce taxes by distributing assets in a more strategic manner.

How Is a Testamentary Trust Created?

To determine whether a testamentary trust would be a useful estate planning tool for an individual, they first need to set up a consultation with an estate planning attorney. If it does appear to be a good fit, they can draft the will that lays out the terms of the trust. This includes layout out who the beneficiaries will be, which assets need to go in the trust, and how they are to be distributed.

For the legal documents to be valid, the testator must sign them in the presence of a notary public and witnesses. Following the testator’s death, the will proceeds through the probate process, which entails verifying the authenticity of the will and trust. After probate, the trustee (the person in charge of overseeing the trust), ensures the proper distribution of assets.

How Do Testamentary Trusts Work?

Assets that go into a testamentary trust can include cash, real estate, and investments. After probate, the trustee ensures the specifications detailed within the will are followed. This includes anything the testator wanted done with their assets, which can include putting more money into certain investments or selling off real estate. Ideally, the testator has also set aside money to pay off any court fees or other expenses associated with having a trust.

The trustee also abides by any timelines set within the trust for beneficiaries to receive any cash, real estate, or investments. A certain event, such as a beneficiary reaching a specific age, which doesn’t necessarily have to be 18, may trigger the distribution. Additionally, money can go out at specific intervals, such as each beneficiary receiving a set amount of money once every month.

It’s possible the testamentary trust may end at a certain point. For example, the testator may want a child to receive money regularly until there’s no more, meaning the trust concludes at a certain age.

The Requirements of a Testamentary Trust

For this trust document to be enforceable, certain requirements must be put in place at the time of creation. Otherwise, a family member or other loved one may contest the distribution of assets.

  • In Writing: The trust, and any estate planning document like a power of attorney or living will, must be in writing. Any verbal agreement or addendum to the written document won’t hold up in court.
  • Testator Gave Consent: The person creating the trust must be of sound mind at the time of signing. This is true when changing any details to the trust at a later date.
  • Notarized and Witnessed: A notary must be present when signing the documents. Additionally, the state of Florida requires two witnesses who should ideally not benefit at all from the terms set up in the will and trust.
  • Compliance With Local Laws: Each state, county, and city may have its own laws dictating how to create any kind of trust. This is why it’s a good idea to consult with an experienced estate planning attorney to oversee all trust funds.

The Difference Between a Testamentary Trust and a Living Trust

Now that you know how testamentary trusts work, it’s a good idea to weigh all of your options and consider a living trust. Whereas a testamentary trust takes effect upon the testator’s death, a living trust is valid when the individual is still alive. It becomes effective immediately and is still managed by the appointed trustee even though the person’s still alive.

The primary difference between the two is that a living trust bypasses the probate process. Probate occurs when an individual passes away, and it’s up to a court to verify the will, identify all assets, pay off any remaining debts, and appoint a personal representative. It can be an expensive and time-consuming process, but a living trust avoids all that because the person who establishes these legal documents can move assets into the trust while they’re still living. This also means assets become protected against creditors in the event the deceased still owes any debts.

What Are the Advantages of a Testamentary Trust?

Avoiding probate court is a major benefit of a living trust, but the other version has plenty to consider, too. Those with young children can benefit by ensuring they get money when they’re more financially responsible. Plus, it comes with its own tax benefits.

When a person sells off a valuable asset for profit, they typically need to pay a capital gains tax on the income. However, a person can transfer ownership of that asset to a beneficiary, meaning they can then avoid any capital gain received.

Testamentary trusts also benefit those with life insurance policies. The holder of that insurance account should name a beneficiary of the policy, who is also listed in the will and trust. Upon death, the policy pays out to the trust instead of directly to the beneficiary, further avoiding any extra taxes.

What Should You Know About Revocable and Irrevocable Trusts?

By now, you should have a solid foundation for understanding testamentary and living trusts. However, you may also hear terms like “revocable” and “irrevocable” come up and consider which one is best for your needs.

As the names suggest, a revocable trust is one that can be amended. You can change the terms later in life as long as you’re of sound mind, and it’s typically seen as a good idea if you wish to avoid probate.

However, an irrevocable trust can’t be changed. A revocable trust inherently becomes irrevocable upon the testator’s death because they naturally can’t change anything any longer. However, it can also be established if the person is still alive, and it may be necessary if the person wishes to qualify for Medicaid or avoid estate taxes.

Learn How to Set Up a Testamentary Trust With Trusted Estate Planning Attorneys in Florida

Estate planning is a complicated field, but it’s vitally important to get started as soon as possible because having nothing could impact what your loved ones receive upon your death. An experienced estate planning attorney from Medley Law Firm can provide valuable legal advice and get you started on establishing a thorough family trust. Call us at 850-607-7890 or reach out via our online contact form to get started today.