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Authors Row  

Volume 7 Issue 6

Nov/Dec 2003

Testamentary Trusts

© by Newland & Associates

Here’s a quick refresher on Trusts. There are three parts to all Trusts.

  • The person that creates the Trust who is called the Grantor, or sometimes Trustor, or Settlor, but never Creator, apparently because of modesty or fear of religious retribution. *
  • The Trustee, the person whose duty is to carry out the terms of the Trust.
  • The Beneficiaries, the receivers of benefits from the Trust.

These capacities are spelled out at length in the Estate Planning section of our Website, particularly the Plain English Explanation of Trusts and Wills.

Testamentary Trust means, in essence, a Trust in a Will. Many simple Wills dispose of the assets of the decedent by stating that such assets go “to my surviving spouse; if there is no spouse, then equally to my surviving children.”

What if the person for whom the Will is written is worried about giving assets to minors? Occasionally we have clients with minor children (less than age 18), few assets, and much life insurance. If both spouses die unexpectedly, what happens to sizeable insurance proceeds?

If the children are minors, a guardianship will have to be judicially established unless the Will does not appoint a Guardian for the minor children. But what about an 18-year-old kid getting several hundred thousand dollars of insurance proceeds at age 18? We all know what we were like at 18. Is it possible your children will be more mature? Maybe, maybe not.

This is where the concept of Trusts come in. Can distribution of assets be delayed until the beneficiaries reach certain ages? What about distributing half of the child’s share at age 25 with the remainder at age 30? With Trusts, such results are possible. Without a Trust, “it’s everything at maturity” — age 18.

Beyond a doubt, the best estate-planning device for most individuals is the Revocable Living Trust (“RLT”). The reasons for stating this belief are explained in a chart called "Benefits of Trust Formation" (PDF file requires Adobe® Acrobat®). Some couples and individuals do not want to, or cannot, pay for the costs of preparing an RLT. For such persons, basic Trust provisions, simpler than an RLT, can be placed in a Will creating a “Testamentary Trust.”

Testamentary Trust provisions are often designed primarily to prevent large sums of money from being distributed to young adults if both parents are deceased. For example, a Will with a Trust may provide that if there is no surviving spouse, then all of the assets will go to a designated Trustee to be held until the children reach certain ages. The designated Trustee, sometimes a family friend, is subject to Probate Court supervision for the duration of the Trust.

Is Probate Court involvement good or bad? Since a family friend may not be familiar with fiduciary (Trust) duties, Court supervision can be a welcome safeguard. Conversely, a Testamentary Trust requires annual reporting to the Probate Court. Many Trustees, unfamiliar with such obligations, may be compelled to seek professional help, usually from an attorney. In addition to potential legal fees, as with all judicial matters, there are fees to be paid to the judicial system.

Well drafted RLTs are often 20 or more pages in length since they must cover many possible situations and questions. To incorporate so many details in a Will (although possible) would result in a very long and complex Will. The inherent complexity of such Wills and the amount of attorney time means that the cost of preparing such Wills is often much the same as an RLT.

Many Clients look at me with disbelief when I tell them that the cost of preparing RLTs will, in the long run, be much less than paying an attorney to assist in a probate estate. Most attorneys will earn more fees handling a probate estate than they will drafting an RLT.

Despite this fact, there is still a role for Testamentary Trusts, such as for young couples with minor children and large insurance policies.

The Testamentary Trust is sometimes the answer to the competing needs of the young couple wanting to save funds on attorney’s fees while at the same time provide certain minimal financial protections for their children should both parents die prematurely.

Call Newland & Associates if you need further clarification regarding this subject or need estate planning in general.

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Published by the law firm of Newland & Associates, P.L.C. For a full range of business law and tax-related services, call us at (703) 330-0000. You may also e-mail us at , or visit our web site at http://www.tax-business.com.

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