Why Would I Need a Testamentary Trust?

Many people choose to incorporate at least one trust agreement into their comprehensive estate plans. If you are among them, you will need to make many important decisions during the creation of your trust, starting with whether to establish a living or testamentary trust. Although it is always best to consult with an experienced attorney before making any estate planning decisions, an Indianapolis trust attorney at Frank & Kraft explains why you might decide to include a testamentary trust in your estate plan.

Testamentary vs. Living Trusts

A trust is established through the execution of a legal document called a trust agreement that creates a legal arrangement where assets designated for the benefit of a third party are managed by a Trustee. The Trustee is appointed by the trust creator, known as the Settlor, Grantor, Trustor, or Maker. There are two primary types of trusts: living trusts and testamentary trusts.

A living trust becomes effective during the Settlor’s lifetime and can be either revocable or irrevocable. In contrast, a testamentary trust only takes effect after the Settlor’s death and is established through a provision in the Settlor’s Last Will and Testament. As a testamentary trust is not legally created until after the Settlor’s passing, it remains revocable until activated but then becomes irrevocable once it is activated after the Settlor’s death.

When Is a Testamentary Trust the Best Option?

While seeking professional advice form an experienced attorney is essential when making decisions about your estate plan, learning about the benefits and uses of a testamentary trust can help you determine if a testamentary trust aligns with your overall estate plan goals and objectives.

Typically, a testamentary trust is the preferred option for parents with young children that they want to provide for if something happens to them while the children are still minors. Minors cannot inherit directly from the estate of a parent. As such, an adult must manage the inheritance of a minor until the child reaches the age of majority. Establishing a testamentary trust allows a parent to choose the Trustee, thereby deciding who will manage the assets they leave behind for their children.

Another advantage to choosing a testamentary trust instead of a living trust to pass down an inheritance to anyone after your death is that you do not incur the costs associated with administering the trust until the trust is truly needed.

An important disadvantage to choosing a testamentary trust is that the assets used to fund the trust will be included in your probate estate. Conversely, assets transferred into a living trust bypass probate when you die. Whether assets are part of your probate estate is something to consider for two reasons. First, you need to understand whether the assets held in a trust will be counted for federal gift and estate tax purposes and second, you need to consider how quickly the assets involved will be needed by the beneficiaries. Assets held in a living trust can be distributed at any time whereas assets used to fund a testamentary trust may get held up for some time during probate. As such, assets held in a testamentary trust may not be immediately available.

To ensure that you make the right choice for you and your estate plan, always seek guidance from an experienced estate planning attorney before deciding which type of trust to establish and during the creation of your trust agreement.

Would You Like to Know More about a Testamentary Trust?

For more information, please join us for an upcoming FREE seminar. If you have additional questions about how a testamentary trust might fit into your estate plan, contact an experienced Indianapolis trust attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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