There is more than one way to plan for the distribution of your estate assets after you are gone. The simplest way is to execute a Last Will and Testament that gifts all your assets to the named beneficiaries. Sometimes, however, making outright gifts in a Will is not the best option. In that case, you may decide to incorporate a testamentary trust into your estate plan. The Los Angeles attorneys at Schomer Estate & Wealth Advisors explain how a testamentary trust works and discuss why you might want to include one in your estate plan.
Why Might I Need More than a Will?
For most people, a Will is the first estate planning document they create and often remains the foundation of their estate plan for many years to come. A Will allows you to decide who will administer your estate after you are gone and can provide for the distribution of all estate assets. There are two important drawbacks, however, to using a Will as your only vehicle to pass down an inheritance. First, when you make a gift in a Will it is gifted to the beneficiary as a lump sum. In other words, you cannot stagger the distribution of gifts made in a Will. The second important disadvantage to relying entirely on a Will to distribute your estate assets applies to parents with minor children. A minor child cannot inherit directly from your estate. Therefore, an adult must manage gifts made to a minor beneficiary. A Will is not the best estate planning tool available to ensure that a minor child’s inheritance is managed and protected according to your wishes. Both concerns can be alleviated by creating a testamentary trust.
What Is a Testamentary Trust?
A trust is a legal agreement that allows you to appoint someone (the “Trustee”) to manage and protect assets intended to benefit a third party, such as your minor children. Trust can activate during your lifetime or after your death. When a trust activates after your death it is referred to as a “testamentary” trust. A provision in your Will is used to create and activate a testamentary trust after your death. Because a testamentary trust is not activated until after your death, a testamentary trust is an irrevocable trust.
What Are Some Advantages to Creating a Testamentary Trust?
A testamentary trust offers several important advantages over relying entirely on your Will to pass down assets. You are able to decide who will manage the inheritance left for your minor children by appointing the Trustee of your choice. You also can create trust terms that can dictate how often distributions are made. You can even include provisions that limit how trust assets are used by the beneficiaries. Even if your beneficiaries are not minors, a testamentary trust lets you distribute an inheritance over time instead of giving a young adult beneficiary a lump sum. There are also tax benefits to the beneficiaries of a trust.
Are There Disadvantages to Creating a Testamentary Trust?
One important disadvantage to relying on a testamentary trust instead of creating a living trust is that the assets transferred into a testamentary trust do not avoid probate whereas assets held by a living trust at the time of your death do avoid probate. This is because the trust does not take legal ownership of the assets until after your death, meaning that you still own the assets at the time of your death and assets owned by you are part of your probate estate unless they fall into an exemption.
Can We Help You Create a Testamentary Trust for Your Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how a testamentary trust works, contact the experienced Los Angeles trust attorneys at Schomer Estate & Wealth Advisorsby calling (310) 337-7696 to schedule an appointment.
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