Could a Testamentary Trust Be What Your Loved Ones Need?

One of the main reasons that a person creates a revocable living trust (a trust established during a person’s lifetime that they can amend or revoke) instead of relying on a will to transfer their money and property to their beneficiaries is to avoid probate. Probate is the court process during which a person’s will is found to be legally valid and their money and property are distributed to the individuals or organizations named in their will. There are pros and cons to probate, and after weighing them, some people may prefer to establish a testamentary trust, which is a trust created through a will—even if this means that the person’s money and property must go through probate before the trust is funded and money is given to beneficiaries. There are other reasons why a testamentary trust may be a great option; for example, they allow you to direct the amounts and timing of distributions to beneficiaries and reduce the upfront costs associated with the creation of the trust.

To Avoid Probate or Not to Avoid Probate: That Is the Question

In deciding whether a testamentary trust is right for your family or loved ones, consider whether avoiding probate is a priority for you and evaluate the pros and cons, which may vary depending on jurisdiction and the size of your estate.

The fees your estate must pay during the probate process will vary depending on the size and complexity of the estate as well as state law, which sets the amounts charged for court filings. In some states and for larger estates (such as in Florida), probate can be very expensive. During the probate process, an estate may have to pay court fees, executor’s fees, attorney’s fees, accounting fees, appraisal and valuation fees, a probate bond, and other miscellaneous fees. These expenses can quickly add up and reduce the amount your beneficiaries will ultimately receive. However, for smaller estates and in some states, the probate process is relatively inexpensive and may not be a significant consideration in determining whether to choose a will that establishes a testamentary trust at death over a revocable living trust. In Texas, for example, the cost and fees for an uncontested probate with a properly drafted will is currently typically under $4,000.

In addition, depending upon the process established in each state and the complexity of the estate, probate may be time-consuming and delay the distribution of funds from the testamentary trust for months or years. In states in which procedures allow probate to be expedited in many situations, this may be less of a concern.

Because probate is a matter of public record, some documents, including your will and information about the testamentary trust it creates upon your death, can be accessed by any member of the public, resulting in a lack of privacy. As a result, personal information about your family and other beneficiaries, including who is inheriting and the types of money and property they are inheriting, is available for anyone to see. In contrast, a revocable living trust does not become part of the public record, allowing the identities of your beneficiaries and the details about your estate to remain private.

Because it is a court process, probate involves oversight by a judge or court clerk until all distributions have been made. Trustees of a testamentary trust could need to meet regularly with the probate court, which will monitor its administration until the trust expires. While some may find this oversight burdensome, it may provide peace of mind for those who want additional assurance that the trust will be administered as they intended.

Maintain Control Over the Distribution of Money and Property

Beneficiaries under a will generally receive the money or property outright as soon as distributions are authorized by the probate court (except for minor children, whose inheritance may be held in a custodial account until they reach the age of majority). However, if you include a testamentary trust in your will, the terms of the trust can specify the timing and amounts of the distributions to your beneficiaries. Although a testamentary trust is created when you pass away, you outline the instructions for the trust in your will during your lifetime and can change them at any time while you are alive.

A testamentary trust may be beneficial for parents of young children, adult children who have many creditors or poor spending habits, or disabled children who need ongoing support and need to maintain eligibility for government benefits. It may also protect beneficiaries in the event of divorce by safeguarding their inheritance during division of property. The trustee you name in your will has a responsibility to make distributions in accordance with the instructions you provide in your will. As a result, you can provide your family members with resources they need over time until the trust terminates. You can specify if you want the trust to continue until your children reach a certain age or meet a particular milestone. In addition, you can instruct what distributions should be used for, such as costs associated with your children’s health, education, maintenance, or support.

Defer Creation of the Trust Until You Pass Away

A revocable living trust is typically more expensive to create, so a testamentary trust is a good option if you need to minimize costs now but think a trust will ultimately benefit your family members and loved ones. A testamentary trust will be created and funded after you pass away, and the costs of establishing it will be borne by your estate, making it a more affordable option during your lifetime. This also means that you will not have to change ownership of any accounts and property during your lifetime, since this will be part of the funding process after your death. Your wealth may have time to grow over the course of your lifetime, and your estate may be better able to cover the costs when you pass away.

We Can Help

Both revocable living trusts and testamentary trusts offer benefits that can ensure that your wishes are carried out and your family and loved ones are cared for. If you are unsure about which type of trust you should include in your estate plan, call us today to set up an appointment. Our firm can help you think through what will work best for your unique circumstances.