In estate planning, the use of trusts to manage the distribution of assets is becoming increasingly more common. However, for many people, the idea of setting up a trust during his or her lifetime is overwhelming and perhaps even unnecessary. For those who desire a trust without the lifetime work, a testamentary trust may be a good option.
There are two overarching types of trusts: inter vivos trusts and testamentary trusts. An inter vivos trust is one that is set up during the grantor’s lifetime, and a testamentary trust is a trust that is set up after the grantor’s death.
Estate planning attorneys frequently use inter vivos trusts because they offer the most flexibility in planning. The grantor places property into the trust, effectively doing the work up front. Property in a trust does not go through probate, but privately passes directly to beneficiaries.
However, not every grantor has a desire to do the work to avoid probate. Many people instead want the benefit of a trust to manage ongoing distributions, but without beginning the trust during their lifetime.
Testamentary trusts are popular for several reasons.
First, testamentary trusts are relatively simple. Terms of the trust are clearly determined, but held within the individual’s last will and estament. Instead of having a separate trust document written, the trust is found within the will.
Second, testamentary trusts are inexpensive. Because the trust is tucked into an essential document, there is no additional expense of setting up a trust. The trust simply exists within the already necessary document.
Third, testamentary trusts require no additional work up front for the testator. The trust does not exist until after the testator’s death, so work of transferring property into the trust is left to the executor to handle. Many wills include merely “trigger” trusts, so the trust only takes effect if a specific circumstance of the beneficiary “triggers” the trust to be needed. For example, many wills include triggering provisions just in case a beneficiary is disabled.
Testamentary trusts provide simple options to avoid more complex planning. However, there are some disadvantages to using testamentary trusts that must be considered.
Testamentary trusts must go through probate to be set up. This means testamentary trusts do not provide two of the most significant benefits of trust planning: privacy and expediency. Probate is public and wills are publicly recorded, so testamentary trusts also would be a matter of public record.
Also, testamentary trusts are not a good option for testators with disabled or dependent beneficiaries. Because the trust is not actually funded until probate is complete, beneficiaries would be waiting on necessary financial assistance.
Similarly, life insurance companies may not be able to use a testamentary trust as a beneficiary. While life insurance could be left directly to beneficiaries, for minor children and disabled beneficiaries, this is usually not a good option.
Testamentary trusts also offer no asset protection during lifetime. The trust is only funded with whatever money and property is left after all creditors have been paid.
Finally, testamentary trusts are not a good option for blended families because the surviving spouse still can change his or her own will after the first spouse’s death. A better option is to use an inter vivos trust that prevents beneficiary changes after the first spouse’s death, ensuring the surviving spouse has access to funds, without allowing the spouse to effectively cut out the deceased spouse’s beneficiaries.
Testamentary trusts offer a simple way to control asset distribution after death. However, trust planning should be made intentionally in order to ensure that the outcome you intended is what actually will happen.