When you create your estate plan, you will likely start by executing a Last Will and Testament. Although your Will can dispose of your entire estate, a comprehensive estate plan typically includes additional estate planning tools and strategies that help achieve additional estate planning goals and objectives. One of the most common additions to a comprehensive estate plan is a trust. If you decide to include a trust in your estate plan, one of the first decisions you will need to make is whether to create a testamentary trust or a living trust. Knowing when a testamentary trust is usually the best choice will help you decide which type of trust you need for your estate plan.
Trust Basics – The Elements
A trust can be as simple, or as complex, as you wish to make it. All trusts, however, start with the same basic elements, including:
- Settlor – creating a trust starts with a Settlor, also referred to as a “Grantor” or “Trustor.” The Settlor is the person who establishes the trust.
- Trustee – the Settlor must appoint someone to be the Trustee of the trust. The Trustee manages the trust assets and administers the trust according to the trust terms created by the Settlor.
- Beneficiary – a beneficiary receives the benefit of the trust. A trust must have at least one beneficiary but may have numerous beneficiaries. A beneficiary can be a person, a charity, or even the family pet. In addition, a trust may include both current and future beneficiaries.
- Trust terms – the Settlor creates the terms that dictate how the trust is to be administered. A Settlor may include any terms he/she wishes as long as those terms are not illegal or unconscionable.
- Funding – the purpose of a trust is to protect, grow, and/or distribute assets. Therefore, the Settlor must fund the trust with the intended assets which may include just about any type of assets from cash and securities to real property and life insurance proceeds.
Testamentary vs. Living Trusts
Beyond the basics, all trusts fall into one of two broad categories – testamentary or living trusts. A testamentary trust is one that does not become active until the death of the Settlor. Typically, a testamentary trust is triggered by a provision in the Settlor’s Last Will and Testament. A living trust, formally known as a “inter-vivos” trust, activates as soon as all of the formalities of creation are complete and the trust is funded.
When Is a Testamentary Trust the Best Choice?
As with other important estate planning decisions, you should consult with your New York estate planning attorney about which type of trust is best for your specific estate planning goal; however, there are some common estate planning goals for which a testamentary trust is generally considered the best choice, including:
- Protecting the inheritance of minor children – a minor child cannot inherit directly from a parent’s estate. As a parent, however, you likely want to leave behind assets for your child’s care and maintenance. A testamentary trust allows you to do that. Because the trust will only be necessary if you die before your child reaches the age of majority, there is no reason to create a trust that activates prior to your death, making a testamentary trust ideal.
- Probate avoidance – probate can be costly, both in terms of time and money, for your beneficiaries. It is also considered public record. One way to keep your gifts private and decrease the cost of probate is to use an intervivos trust. Because trust assets are not required to go through probate, using an intervivos trust is an excellent probate avoidance tool.
- Staggering disbursements – if you are concerned about leaving a lump sum inheritance to a beneficiary, for any reason, a testamentary trust may be the solution. By transferring the inheritance into a testamentary trust, smaller, staggered disbursements can be made instead of a larger lump sum.
For more information, please download our FREE estate planning worksheet. If you have questions or concerns about when a testamentary trust is the best choice, contact an experienced estate planning lawyer at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.
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