For most people, a Last Will and Testament forms the foundation of their estate plan. A comprehensive estate plan, however, will also include a number of additional documents, estate planning tools, and strategies that all work together to ensure that all your estate planning goals are met. One of the most popular additions to a comprehensive estate plan is a trust. Although once used almost exclusively by wealthy families to safeguard and pass down the family wealth to future generations, trusts have since evolved to the point where they are now commonly used in the average estate plan. One reason why trusts are so popular is the simple fact that a trust is extremely flexible, allowing the Settlor (person creating the trust) to accomplish a wide variety of estate planning goals with a trust. If you are considering the addition of a trust to your estate plan, the first decision you will need to make is whether you need a testamentary trust or a living trust. That requires you to know when a testamentary trust is the best option and when a living trust is preferable.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. The beneficiaries of a trust may be individuals, charities, organizations, or even the family pet. In addition, a trust may allow for both current and future beneficiaries.
Testamentary vs. Living Trusts
All trusts fit into one of two categories – testamentary or living trusts. A testamentary trust is one that does not take effect until the death of the Settlor whereas a living trust will activate as soon as all the formalities of creation are complete and funding is established.
Revocable vs. Irrevocable
Living trusts are further divided into revocable and irrevocable living trusts. A revocable living trust is one that can be modified or revoked by the Settlor at any time and without the need for a reason. An irrevocable living trust cannot be modified or revoked by the Settlor once the trust activates. A testamentary trust is, by definition, a revocable trust because it does not even take effect until after the death of the Settlor, at which point it becomes an irrevocable trust.
Why Would a Testamentary Trust Be a Better Option?
The type of trust you create will depend on the goals you wish to accomplish with the trust and the motivation for the creation of the trust. Because a testamentary trust does not become effective until the death of the Settlor, they are commonly used when a Settlor wishes to retain a certain degree of control over the assets left behind for beneficiaries and/or when the beneficiaries of the trust are minors. Minors cannot inherit directly from your estate. Therefore, any assets you wish to leave for your minor children must be left in the care of someone else, or in a trust. By creating a testamentary trust for those assets, you know that someone (the Trustee) will manage those assets and protect them until your children reach the age of majority. Oftentimes, a testamentary trust continues to be useful even after minor children reach adulthood because it can provide for staggered disbursements of the assets held in the trust. In fact, that is another common reason why a testamentary trust is used to make gifts to any beneficiary – if a lump sum might be too much to hand a beneficiary all at once, a testamentary trust can be established to provide smaller disbursements over an extended period of time. Doing so provides some protection against spendthrift beneficiaries who would otherwise squander their inheritance. Finally, by waiting until your death for the trust to activate, there are no administration fees associated with the trust until the trust is truly needed.
For more information, please download our FREE estate planning worksheet. If you have questions or concerns relating to testamentary trusts, contact the experienced estate planning attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.