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How to set up a testamentary trust

Ensure your assets are distributed when and how you see fit.

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Testamentary trusts are one of the various ways you can divvy up control of your estate. Formed as part of a will, these trusts have one main purpose: To make sure your assets are allocated according to your wishes when you die.

What is a testamentary trust?

At its core, it’s a trust created as part of a will. When a person dies and leaves behind a will, and that will states a testamentary trust should be created and all their assets should be transferred to the trust, then this trust comes into effect. Testamentary trusts ensure your assets are divided how and when you desire.

For example, you may want your assets to go to your heirs at a specific date in their life. For that reason, you choose to add a provision for a testamentary trust in your will. With the provision in place, the testamentary trust is then created once you die and all assets are transferred into the name of the trust, until the specified date.

Who handles a testamentary trust?

Usually, a trustee — or the executor of the estate — will be appointed for the testamentary trust. It’s the responsibility of the trustee to manage the trust until the specified time listed in the will. Once the period mentioned in the will passes, all the assets of the trust are transferred to the legal heirs or beneficiaries of the trust.

What are the advantages of creating testamentary trusts?

The main advantage of creating a testamentary trust is to delay the transfer of assets to the heirs of a will or the beneficiaries of a person’s estate. For example, if a parent has very young children, the parent may not want their minor children to be burdened with the management of their assets.

In these situations, the parent can add a clause for the creation of a testamentary trust in their will and specify a certain age their children will get control of the designated assets. Once the minor children reach the age specified in the will, all the designated assets of the testamentary trust are transferred to the children.

How can a testamentary trust affect taxes?

Any income that arises from the assets of the trust is the sole property of the beneficiaries. So, by creating a testamentary trust, it’s possible to protect minor children’s interests and distribute the income of the assets among several people — possibly lowering the individuals’ tax liability.

Let’s assume a person who has a spouse and two minor children dies and leaves behind assets worth $200,000 in their will. If there’s no testamentary trust, the assets will pass to the wife. Any income that accrues from this money will then be taxed in the spouse’s name alone.

However, if the person was to create a testamentary trust and name their spouse and kids as the beneficiaries the income accrued from the assets would be divided among three people instead of just one, lowering the tax burden for the spouse.

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Appointing a trustee for testamentary trusts

While a trustee is typically mentioned in the will, the appointed trustee can refuse to accept responsibility for the testamentary trust since it can be an extremely time consuming and complex duty. In such cases, a probate court usually appoints a trustee from among the friends and family members of the beneficiaries of the testamentary trust.

Since the trustee manages all the assets of a testamentary trust until they pass to the beneficiaries, it’s important to appoint someone trustworthy. The assets of the trust grow or are depleted according to the investment options chosen by the trustee, so a responsible and knowledgeable person is vital.

Is a professional trustee worth paying?

The trustee may be required to handle the trust for several years before the beneficiaries come of age, so there could be trustee fees to content with — especially if the trustee is a professional. However, it can be more cost-effective to pay for professional advice than leave the assets in the hands of minors.

Testamentary trusts and probate courts

Testamentary trusts are regularly examined by the probate courts to ensure the trust is run and managed in the best interests of its beneficiaries. If a testamentary trust is valid for several years, it’s the responsibility of the trustee to make sure it’s periodically examined by the probate courts.

Bottom line

You can use a testamentary trust to set up your family for success. It requires finding a trustee who will look out for the best interests of your beneficiaries, so you’ll have a big decision to make.

Read our guide to estate planning for even more information on trusts and wills.

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