How do Testamentary Trusts Work?
Testamentary trusts are legal estate planning documents created following the terms or instructions set out in the Last Will and Testament. In other words, a trust is created by the terms of the Will. Upon the grantor’s death, the court will verify the Will to establish its authenticity before the trust can be established.
It is, therefore, crucial to hire skilled lawyers from a family law and estate planning law firm in San Antonio to help you create an enforceable testamentary trust that will accomplish your goals. They can evaluate the contents of the document and remove any contradictory clauses. More importantly, they can advise you on what kind of trust is best for your situation and whether there might be a better way to accomplish your goals. Beware of a practitioner that offers only one solution for everyone. The lawyer you consult should be able to explain to you why the method chosen is the best alternative for you.
By creating a testamentary trust, a “grantor” or creator of the trust establishes a fiduciary relationship that enables a trustee to manage assets on behalf of the trust beneficiaries. That lawyer-speak means a person, called a “grantor,” sets up a plan for his or her assets whereby a person called a “trustee” manages the assets for the best interests of the beneficiaries. The relationship of the trustee to the beneficiaries is called a fiduciary relationship because the trustee must exercise a high degree of care to protect the beneficiaries from loss. The actual trust itself may be as simple as a bank account that the Trustee draws funds from to benefit the beneficiaries according to the rules contained in the trust document.
Once the court authorizes the document, the executor of the Will funds the testamentary trust by transferring the assets from the deceased person’s estate into the trust, and the Trustee is then responsible to manage and ultimately distribute the assets. The beneficiaries can only receive the assets once some predetermined conditions are met, for example, when the children reach a certain age. Sometimes the trustee is given discretion to make early partial distributions for certain purposes such as the education, medical needs, or well-being of the beneficiaries. A testamentary trust lasts until the terms of the trust expire and assets have all been completely distributed. A trust cannot start nor continue unless there is something of value contained in the trust.
What are the Requirements for a Testamentary Trust?
A trust of any kind requires some type of property to manage, a person to manage the property, a person or persons to benefit from the trust, and instructions on how the property is to be managed. The distinguishing factor of a testamentary trust is that the trust is created in a Will and is funded by the estate assets after the death of the trust creator.
A testamentary trust usually has at least three parties as there are three roles that must be filled:
- The grantor or trustor: The person who creates and funds the trust, which in this instance is also the person who signs the Will
- The beneficiaries: The persons named in the Will who should ultimately receive the grantor’s assets
- The trustee: The person who manages the assets held in the trust on behalf of the beneficiaries and distributes the assets according to the terms set out by the grantor
The trustee chosen by the grantor should be someone with the grantor’s and the beneficiaries’ best interests in mind and someone capable of making wise financial choices. If the selected trustee declines the appointment or is unable to serve when the trust is established, then the alternate trustee named in the Will is appointed or, if there is none, then the court usually appoints a new one. Alternatively, another person can volunteer for the role or a financial institution may be chosen to fulfill the role.
Testamentary trusts are often created for minor children, relatives, and others who may inherit estate assets. Sometimes the purpose is to protect a beneficiary who is disabled or unable to manage their own resources and sometimes the purpose is to avoid taxes. A trust may be used as a less expensive alternative to a guardianship. However, trusts can also be created for the management of charitable distributions. Consider consulting reputable trust lawyers in San Antonio regardless of the approach you wish to take with your testamentary trust.
Does a Testamentary Trust Go Through Probate?
Grantors create testamentary trusts as part of their last Will. So, the trusts must undergo probate to have the Will authenticated. Generally, testamentary trusts have more court involvement and less privacy than other types of trusts to the extent that a Will is filed in the public record. The extent of the legal fees involved will depend on a number of factors, but primarily the cost depends on the way that the Will is written, so it is essential to have a lawyer who is knowledgeable in this area of law to write the Will which creates the testamentary trust.
If the Will is probated in Texas and is properly set up as an Independent Administration, then the estate inventory can be distributed, in most instances, privately only to the Will beneficiaries and the Trustee, so the extent or value of the total assets put into the testamentary trust might be hidden from the public unless a Will contest is filed. If the trust consists of cash or securities in an account, then the future distribution of those assets or funds to the beneficiaries is generally not public record unless a beneficiary demands an accounting in court. The public may know that a trust exists, may know some or all of the trust terms, and may know the identities of the Trustee and beneficiaries, but the true value of the testamentary trust or the timing when the assets are actually distributed are not necessarily public record.
What is the Difference Between a Testamentary Trust and a Living Trust?
A living trust is also known as a revocable living trust or an inter vivos trust, and it is created outside of probate. That means the beneficiaries don’t have to go through the court system to have their assets distributed from a living trust. Instead, the trustee distributes the assets and funds to the beneficiaries upon the grantor’s death or later depending on the terms of the trust. The living trust funds may be available faster because there is no probate, depending upon the terms of the living trust. However, if a beneficiary of a living trust has evidence that the Trustee is not following the terms of the living trust, then expensive and lengthy litigation may result even for a living trust.
There are many factors to be considered in deciding whether to set up a living trust or a testamentary trust. One consideration is whether the grantor is ready to fund the trust because the living trust does not exist until it is at least partially funded. A testamentary trust is not funded until after the grantor has died.
While testamentary and living trusts are both helpful documents in estate planning, living trusts are more flexible and may entail lower long-term costs. Again, there are many factors that may influence the long-term costs such as the way that the trust is written, whether the Trustee will receive compensation for their work, and whether the living trust truly avoids probate.
A revocable living trust is more flexible in the sense that the trust creator can take property in or out of the trust, or can even dissolve the entire trust, up until the grantor’s death. A Will can also be changed at any time before the grantor has died or lost mental capacity, but the testamentary trust has not even started until the Will is probated. Although people are often told that a living trust avoids probate, that is not always the case. Whenever a living trust is created, a reputable lawyer will always also create a Will, just in case some asset is not included in the living trust, and that asset must then go through probate to be added to the trust after the creator dies.
Additionally, living trusts can be revocable or irrevocable, meaning the grantor may or might not be permitted to change a living trust after it is created. There is sometimes a good reason to create an irrevocable trust that can’t be changed once created. In some instances, a husband and wife will create a living trust together that can be revoked as long as they are both living, but when the first spouse-grantor dies, the living trust becomes irrevocable. A testamentary trust is always irrevocable since it can only be established after the grantor dies.
What Are the Benefits of Testamentary Trusts?
While testamentary trusts are useful estate planning tools, they may not be right for everyone. The lawyer and client should carefully consider, among other things, the value and nature of the client’s property, the location of the property, whether the client intends to move out of the state later, the current tax laws, and the client’s reasons for wanting someone else to manage the property. Working with experienced trust attorneys in San Antonio would put you in a better position to evaluate your estate planning needs and determine if the tool suits your circumstances.
However, the following advantages of testamentary trusts are pointers that may help you decide:
- Testamentary trusts enable parents to distribute assets to their children in the event of death.
- The document doesn’t place a limit on the number of beneficiaries who can be named in the Will.
- If the beneficiaries are minors, their inheritance remains protected until they’re old enough to use the money responsibly, which may be later than 18 years of age.
- If the beneficiary is receiving government assistance, the trust terms can be set up in a way that will not cause the government benefits to cease.
- If the purpose of the trust is to avoid estate tax, it can be adjusted based upon the actual tax rate and threshold that is in effect at the time of death.
- The grantor creates instructions for the assets in their lifetime, but the trust is established after their death, which leaves more time for the assets to grow in value.
- The grantor can change the trust instructions anytime while they’re still alive.
- The cost of establishing the trust comes from the estate after the grantor’s death, making it a low-cost option upfront.
- It may be the desire of the grantor that the beneficiaries not learn about the existence of the trust until after the grantor has died.
On the downside, the probate process may be lengthy, leaving the beneficiaries of a testamentary trust without assets for some time because of the court system, while a living trust may have been distributed without any delay. Further, the testamentary trust is not funded until all the estate creditors have been paid, while a living trust may have avoided some or all of those estate creditors because the assets that are already in the trust are not part of the estate subject to those debts. Discuss all these factors with your San Antonio trusts attorney before creating the trust.
How Can I Create a Testamentary Trust?
Creating a testamentary trust can be complex, and without the right knowledge, you may not fully understand the implications of the tool. Inconsistencies or mistakes in the document can have costly repercussions in the future. On the other hand, it may be that a trust is a more expensive and complicated tool than your estate really needs to accomplish your goals. Lawyers from a reputable San Antonio family law and estate planning law firm can guide you on everything you need to do to have an enforceable trust and to advise you on the best tool for your situation.
They can guide you in selecting your beneficiaries, trustee, and the assets to place in the trust. Your lawyers will also help you include the specifications of how and when the assets will be distributed to the beneficiaries, and the information will be communicated to the beneficiaries of a testamentary trust through the last Will and Testament.
An Experienced Estate Planning Professional Helping You Protect Your Assets and Beneficiaries
A testamentary trust is one of the most effective estate planning tools to ensure your beneficiaries and loved ones receive the assets they are entitled to after your death. Creating a trust is not easy, but experienced trust attorneys understand everything that goes into establishing a trust and can help you to ensure you do the right thing.
Our family law and estate planning law firm has been helping clients set up trusts that meet their specific needs and goals while complying with state and federal laws concerning trusts. We can handle everything that involves your testamentary trust to ensure everything is clear when it comes to distributing your assets. Contact us to schedule an initial case evaluation.