Why Houston, Texas Parents Need to Have a Testamentary Trust

When it comes to estate planning, many of us wonder about the best way to secure our family’s future in case of our unexpected passing. For younger families, a common concern is how to pass down assets before children reach the age of 18. If you are a parent of minor children in Texas, a testamentary trust could be the ideal solution to ensure proper planning for your family’s future.

A testamentary trust is created in your will. No matter when you create your will, it has no legal importance until you pass away. At that time, the terms of the will would have some legal importance behind them. At the same time, the trust created within the will would also come into being. You, as the testator, the person who creates the will, would be able to place property into the trust for the benefit of your minor children. You would also be able to create the terms of the trust, such as when your children could gain access to the property held within it.

A testamentary trust comes into existence only after your death. In contrast, revocable trusts are established during your lifetime. Until you pass away, property in a testamentary trust cannot be transferred to a beneficiary. It is not uncommon for you to see different testamentary trusts created for different people. For example, while you are alive, you likely would not want to lose control over certain assets or pieces of property. After you pass away, however, that same desire would serve no purpose, and property could pass to different family members, friends, or even charitable organizations.

Benefits of creating testamentary trusts for property control

Creating testamentary trusts provides you with a handful of benefits. First, leaving behind assets in trusts or your beneficiaries allows you to have control over the property up until the time of your passing and even after you have passed away. You control how and when to distribute the property and assets in a testamentary trust to your beneficiaries. If you own real property, you might want to distribute these assets differently than vehicles, cash, or other types of assets.

Therefore, testamentary trusts allow you to maintain a great degree of control over your property and assets during your lifetime while properly planning for distributing those same assets once you have passed away. As a result, state planning attorneys and those in the financial community have become proponents of this wealth management strategy, asset handling, and state planning.

I have seen testamentary trusts utilized effectively when a person has children, even adult children, who are not the most responsible with money or are living a lifestyle that the trust creator does not approve of for various reasons. By creating a testamentary trust within your will, you can specify how property should be distributed if you are uncomfortable with the choices or lifestyles of your children or other family members. Holding the property in a trust helps protect it and prevents misuse that could harm your children or loved ones.

What are some other major benefits of utilizing testamentary trusts?

The executor is the person responsible for administering the estate and fulfilling the wishes of a deceased person according to their will. If you have created a will, then you likely have named someone as an executor. That person has a fiduciary duty to put your interests in wishes as stated in the will ahead of their judgment when distributing property to beneficiaries and paying debts. Therefore, the executor plays a significant role in managing a deceased person’s estate planning.

By the same token, we can look to the trustee of a testamentary trust similarly. For example, you may name the same person as the executor of your estate to be the trustee of your testamentary trust. The responsibilities of a trustee are similar to the responsibilities of the executor of your estate. The trustee must follow the terms of the trust and distribute property contained within the trust based on its terms. This provides a double layer of protection to ensure your property remains safe for your loved ones until the designated person meets certain milestones.

Milestones in testamentary trusts: controlling property distribution

What sort of milestones are we talking about in terms of your loved ones? For many people who create wills and testamentary trusts, those milestones are simply certain ages. For instance, if you desire to have property held in a trust for a loved one until they turn 18, 21, or even 25, you can do so. I have even seen people choose to keep entire pieces of property within a trust and only pay out the interest earned on the principal amounts two beneficiaries of the trust over time in certain intervals.

The beauty of creating a testamentary trust lies in the discretion it gives you regarding property distribution. Instead of transferring assets to beneficiaries outright at your death, you can set specific times and conditions for the transfer, taking their circumstances into account. At the same time, the trustee is available to oversee the entire process and act in a way that conforms with your wishes in terms of the trust.

A testamentary trust not only lets you set conditions for when to transfer property to loved ones, but it also allows you to control how your beneficiaries spend the money after the transfer. For instance, consider a situation where you have a loved one who has a problem with gambling or is deeply in debt. If you choose, you can include provisions in the trust that restrict how your loved one can spend the distributed money. These restrictions, known as spendthrift provisions, are common in estate planning.

Flexibility and creativity in testamentary trust duration

As I mentioned earlier, you can create a testamentary trust that lasts for many years into the future or only for a short period after your passing. Again, the length of time that a testamentary trust will exist is largely based on the specific circumstances of you and your family. Your desire may be to help your children graduate from college without having large sums of money to their name. If your family finds itself in this situation, you might consider a trust that distributes only small portions of money to your children while they are in school. Once they turn 23 or 24, the trust would then release the remaining portion of their inheritance.

There are no limits to the creativity a person can employ when it comes to creating testamentary trust. There are no two people or two family circumstances that are the same. As a result, you should take seriously the responsibility of creating a testamentary trust based on the specific factors relevant to your family. 2 shouldn’t mimic the patterns of what someone else did in creating a state plan based on a testamentary trust. Rather, you and your advisor or attorney should consider the specific circumstances relevant to your life and create a tailored state plan centered around a testamentary trust if those are your wishes.

Long-term control: creating enduring testamentary trusts

On the other hand, you would also have the ability within a testamentary trust to create a trust situation that lasts for many years into the future or does not ever expire or dissolve. For example, you may find yourself in a situation where your intended beneficiaries have never shown an ability to live responsibly or handle money well. Giving large sums of money to those unprepared to handle its consequences is akin to handing the keys to a Ferrari over 2 a 13-year-old. That 13-year-old is liable to wreck the car and destroy their life and property in the process.

As a result, you can limit the extent to which your loved one can get their hands on property or assets of yours after your passing through a testamentary trust. I previously noted that some individuals create trusts that require their property to be invested in specific ways. The interest earned on those investments is then paid to a beneficiary at certain intervals. However, the beneficiary cannot access the principal amount that was invested. The beneficiary would be able to take advantage of the golden eggs hatched but could never gain possession of the goose that laid them.

Issues regarding probate and trusts

A common misconception that I have become aware of in my years as an attorney is that creating a trust like a testamentary trust allows you 2 bypass the probate process whenever you pass away. It is understandable to avoid probate, given the time and costs of going through the courts to administer your estate. However, probate is necessary to transfer assets after your passing. This is, however, assuming that all the property contained in the trust are probate assets instead of non-probate assets.

An example of how a testamentary trust may be utilized effectively in estate planning

When you pass away, your accumulated property can be distributed according to your wishes or according to state laws governing property distribution. The key difference lies in whether you have a will at that time. Having a will prepared ensures greater control over your estate after your passing. Without a will, Texas state laws dictate property distribution, whereas a will grants autonomy to specify recipients and timing, crucial for bequeathing assets to non-family members.

Let’s assume further that you did pass away with a valid will. Your entire estate, all the property, and assets to your name at the time of your death, past three years, will be to your wife. The only exception is that you have placed $100,000 in a testamentary trust for your daughter. In this case, we need to identify the designated trustee of that trust. The trustee is responsible for distributing the property within the trust according to your wishes.

Do you decide to have your younger sister act as trustee of the trust? You chose the dress too and on the 23rd birthday of your daughter. At that point, all the property in the trust will be eligible for distribution to your daughter. However, only funds needed to cover your daughter’s education can be distributed before that time. The main difference between a testamentary trust and a typical trust created during your lifetime is that no money transfers to the trustee for distribution until after your passing. Only your death would trigger the ability of the trustee to do anything regarding your property.

Financial planning is a part of estate planning

To close out today’s blog post, I wanted to share my thoughts on how testamentary trusts can operate as a type of financial planning and estate planning. The most important aspect of financial planning is controlling your money. You have worked hard and been diligent about planning for your financial future through the decisions that you’ve made. Proper planning means being intentional. If you can act with intentionality regarding your financial planning, you are better off. The same goes for you when you are estate planning.

The key lesson here is to be intentional across all aspects of life. Thorough financial planning ensures that you manage your assets according to your wishes both during your lifetime and after. If you prioritize controlling your finances while alive, it makes sense to extend that control into your estate planning. Planning where your assets will go after your passing ensures they serve your family’s best interests, extending your financial stewardship beyond your lifetime.

A testamentary trust allows you and your family to work together to manage your assets responsibly. You can control your assets and property while alive, and after your passing, a trustee will manage your property according to your wishes. Well, no system is perfect, but there is a way for you and your family to work together with a trustee to protect your assets and the beneficiaries of a will or trust.

Conclusion

Before proceeding with this process, it’s advisable to consult with an experienced estate planning attorney. While you may have a general understanding of these arrangements, executing them correctly without the guidance of someone experienced could pose challenges. The estate planning attorneys are a great resource to ask for suggestions and seek creative solutions to your problems.

Considering a testamentary trust as part of your estate planning strategy can provide crucial protection for your family, especially if you have minor children. This legal arrangement ensures that your assets are managed according to your wishes, even after your unexpected passing. By establishing a testamentary trust, you can designate a trustee to oversee these assets until your children reach a specified age or milestone, offering peace of mind that your family’s financial future is secure. Consulting with an estate planning attorney in Texas can help you navigate the complexities and tailor a plan that meets your specific needs and goals.

If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law and learn how your family circumstances may be impacted by the filing of a divorce, child custody, or estate planning case.

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