If you want the power of a trust without the work of maintaining it, a testamentary trust may be the right solution for your estate plan. Estate planning attorneys rely on many trusts, but two categories are most common: inter vivos trusts, trusts set up during your lifetime to offer the most flexibility, and testamentary trusts, as described in the article “Trusts can be created after death” from The News-Enterprise.
For an inter vivos trust, the grantor (the person making the trust) places property into the trust. These assets are thereby removed from the probate estate and pass directly to beneficiaries. Placing property into the trust requires having assets retitled and some trusts pay taxes. Not everyone wants to do the work. However, it is not onerous unless the estate is large, in which case an estate planning attorney can manage the details.
The testamentary trust is quite simple. The terms and directions for the trust are the same as in inter vivos trust but are inside the last will and testament. There is no separate trust document. The trust is located within the will.
The costs of creating a testamentary trust are lower, since the trust does not exist until the person dies. Your executor or personal representative is responsible for transferring assets into the trust. Many wills contain “trigger” trusts, which only become effective if pre-determined circumstances of the beneficiary occur to trigger the trust. If a beneficiary becomes disabled, for instance, the provisions become active.
There are some disadvantages to be aware of, which your estate planning attorney can explain if they pertain to your situation.
Testamentary trusts must by their nature go through probate before they are created. People use trusts to protect their privacy. However, a testamentary trust becomes part of the public record as part of the probate estate. With a testamentary trust, trust documents are private during your life and after you have died.
If dependents require funds from the trust because they are disabled or dependent, they must wait until the grantor dies and probate is completed, since the trust does not exist until after probate. As most people know, probate does not always occur in a timely manner.
Other issues: some life insurance companies may not permit a testamentary trust to be a beneficiary. The trust may only be funded with assets left after creditors have been paid. If there is a home to be sold, assets may not be available for a year or more.
Testamentary trusts do not shield assets during your lifetime, another key benefit for using a trust.
Testamentary trusts offer certain means of controlling distribution of assets after death, but should be considered with all factors in mind, benefits and drawbacks. In estate planning, as in life, it is always best to prepare for the unexpected.
Reference: The News-Enterprise (Feb. 8, 2022) “Trusts can be created after death”
Suggested Key Terms: Trust, Revocable, Irrevocable, Inter Vivos, Testamentary, Grantor, Estate Planning Attorney, Probate, Beneficiaries, Distribution, Testator, Creditors, Assets, Dependents, Disabled, Life Insurance