The testamentary trust is an estate planning device that is particularly attractive to young couples with young children, who often have limited assets.
Typically, spouses are the legal and/or named beneficiaries of each other’s assets. If one spouse dies, the other spouse inherits the deceased spouse’s assets and continues to raise the children. However, what happens in the event of a disaster that results in the death of both spouses, such as an auto accident? Similarly, what happens if one spouse is already deceased and the other spouse dies? If other preparations are not made, assets will be included in the estates of the spouses and probated. A proceeding for guardianship and conservatorship will be necessary in order to name a guardian of the person and a conservator of the estate of the minor children. The children will be entitled to any remaining assets at age 18.
There are a number of disadvantages to this scenario. The primary problem is the plan for the care of the children. The guardian and conservator appointed by the court may not be the person that you would have selected. It is also generally undesirable for a child to receive an inheritance at age 18.
A testamentary trust can help alleviate these problems. A testamentary trust is a trust that is contained in a will. The trust becomes effective upon the death of the settlor (in this case, the spouse who executed the will containing the testamentary trust). Because the trust is contained in a will, probate is required. Thus, unlike other trusts, such as the revocable living trust, the testamentary trust does not avoid probate.
The testamentary trust is attractive to young couples with young children, who often have limited assets, because the testamentary trust is usually funded by life insurance proceeds. In other words, many young couples often do not have sufficient assets in the form of real and personal property in order to adequately fund a trust during life. However, with the infusion of life insurance proceeds, it is possible to fund a testamentary trust at death.
Importantly, a testamentary trust allows the parents to nominate a guardian for their minor children as well as a trustee for the trust. The guardian and trustee may be the same or different individuals. Thus, parents are able to exercise additional control over who will raise their children and manage property. The guardian will be responsible for the legal and physical custody of the children during their minority. However, it is important to note that, while nominating a guardian can help improve the odds that your candidate is selected by the court, there is not a way to guarantee this outcome.
The trustee will hold and manage trust assets for the benefit of the children until specified by the trust agreement. Because the children’s inheritance is held by the trust, there is no need for a conservator; the trustee fulfills this role. The trust agreement will specify when trust assets are to be distributed to the children. Common plans call for 1/3 at age 25, 1/3 at age 30, and 1/3 at age 35. Thus, if you are uncomfortable with your children receiving an inheritance at the age of 18, it is possible to delay the inheritance until your children have had more time to mature.
Alternatively, a revocable living trust may be created and funded nominally during life, achieve an equivalent result to the testamentary trust, and also avoid probate.
If you have additional questions about Testamentary Trusts or are ready to have one prepared, call or come visit with the estate planning attorneys at the Paul Law Firm. Consultations are always free!
Non-Probate Transfers: Personal Property
Non-Probate Transfers: Real Property