When it comes to estate planning, most of us have questions regarding the best method to prepare for our family’s future if we were to pass away unexpectedly. Many younger families have a concern regarding passing down assets before children are over the age of 18. If you are the parent to minor children, then a testamentary trust may be exactly what you need to plan for your future and that of your family properly.
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 is only created once you have passed away. Other types of trusts are revocable trusts which are created during your lifetime. It would be impossible for property within a testamentary trust to be transferred to a beneficiary until you pass away. It is not uncommon 4 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.
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 are in control of how and in what manner the property and assets contained in a particular testamentary trust are distributed to your beneficiaries. If you own real property, then you may want these types of assets to be distributed differently than you would 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 any various reason. By creating a testamentary trust within your will, you can dictate more readily how in win property should be distributed if you are not comfortable with the choices or lifestyles of your children or other family members. Holding the property in a trust allows the property to be kept safe and not be used in a way that could harm your children or other loved ones.
What are some other major benefits of utilizing testamentary trusts?
The person whose job it is to administer and fulfill the wishes of a deceased person in terms of their will is called an executor. 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 is a significant role that must be fulfilled in 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 is almost a double layer of protection to ensure your property is kept safe for your loved ones until the person in question meets certain milestones.
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.
Again, the beauty of creating a trust like a testamentary trust is that you have a great deal of discretion in how properties are distributed at what times. Rather than simply turning over certain pieces of property or assets to beneficiaries at the time of your death without consideration for their circumstances, you can create I trust, which allows you to designate certain times and conditions for property to be transferred. 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.
Even beyond merely conditioning when the property can be transferred to loved ones, a testamentary trust even allows you to control how your beneficiaries can spend money once the property is ultimately transferred to them. For instance, consider a situation where you have a loved one who has a problem with gambling or is deeply in debt. If you wish, you can include provisions within the trust that the money distributed to your loved one cannot be spent in certain ways. These are commonly referred to as spendthrift provisions in the world of estate planning.
As I mentioned earlier, a testamentary trust can be created to last many years into the future or for only 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 this is a position that your family finds itself in, then you may be interested in a trust that distributes only small portions of money to your children while they’re in school, and then once they turn 23 or 24, they would turn over 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 made state plan centered around a testamentary trust if those are your wishes.
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 years old is liable to wreck the car and destroy their life and the 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 already mentioned how I had seen some individuals who have created trusts mandate that their property is invested in certain ways. The interest earned on those investments would then be periodically paid to a beneficiary at certain time intervals. However, the beneficiary would never be able to get their hands on the principle 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 for assets to be transferred once you pass away. 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
Let’s assume a situation involving you, and they are family at the time of your passing. At some point in the future, you are going to die. I hope I am not the first person to share this information with you. Not to be too glib about the subject but when you pass away, the property you have accumulated can be distributed according to your wishes, or according to the wishes are the city taxes based on the laws regarding property distribution at the death of a person. The main difference between these two situations involves whether or not you have a will at the time of your passing.
By having a will ready to go at the time of her passing, you are setting yourself up to have much more control over your state once you do pass away. For example, if you pass away without a will, then the state of Texas would be in control as far as how your property is distributed. On the other hand, a will allows you to have much greater autonomy over whom and when your property is distributed. This can be important if you have people outside of your family that you want the property to pass to at the time of your death.
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 to your wife. The only exception to this was that $100,000 was placed in a testamentary trust for your daughter. In this situation, we would need to look to who is named as the trustee of that testamentary trust. The trustee is the person who is charged with distributing 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 which time, all of the property contained in the trust will be eligible to be distributed to your daughter. However, only money sufficient to pay for your daughter’s education could be distributed before that time. The main difference between a testamentary trust and a typical trust created during your lifetime is that no money is transferred for the trustee to distribute until you pass away. Only your death would trigger the ability for 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 can control 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 are a state planning.
The most significant lesson to learn in all this is to be as intentional as you can when it comes to all areas of your life. For instance, thorough financial planning is about ensuring that your finances are cared for and dealt with according to your wishes after your death, just as they are during your life. If you go through life wanted to control your finances as much as possible, then it would make sense that you would want to do the same after your passing. The best way to do so is regarding considering where your assets will go after your passing. If you limit your financial planning to the periods during your life, then you are missing out on being able to ensure that your assets and property are handled according to what is in your family’s best interests.
A testamentary trust is an opportunity for you and your family to work together to cause your assets to be handled as responsibly as possible. You can control your assets and property while you are alive, and the impact of your death would result in a trustee being able to control your property according to your wishes even after you are gone. Well, no system is perfect this there’s a way for you and your family 2 work together with a trustee to protect your assets and the beneficiaries of a will or trust.
However, it is recommended that you consult with an experienced estate planning attorney before studying this process. It is one thing to have a general idea about these types of arrangements. It is another for you to go about trying to implement them correctly without the advice of someone who’s been there before. The estate planning attorneys are a great resource to ask for suggestions and seek creative solutions to your problems from.
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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