benefits of a testamentary trust

8 minute read

Is a Testamentary Trust Right for You?

Wondering if you need a Testamentary Trust? Our guide breaks down the pros and cons of this Trust to help you decide if it’s the right option for you.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Estate planning is a necessary, but oftentimes confusing, way to ensure your loved ones are taken care of following your death. Trusts can work in tandem with a Last Will and Testament to ensure your assets are distributed according to your wishes. The creation of a Trust can also help guarantee your assets remain in good hands and avoid tax liabilities. Depending on your wishes and the needs of your family, there are several common types of Trusts to choose from.

A Testamentary Trust, in particular, can be a great option for those with young children or grandchildren. The different types of Testamentary Trusts can designate how and when your assets will be distributed following death.

[We now offer Testamentary Trusts! Find out if it's the right plan for you– click here to learn more.]

Keep reading to learn more about Testamentary Trusts, including:

What is a Testamentary Trust & How Do They Work?

A Testamentary Trust is created in accordance with the instructions in a person’s Last Will and Testament and outlines when assets will be given to certain named beneficiaries. Unlike a Living Trust, a Testamentary Trust goes into effect after one’s death. The Testamentary Trust definition outlines three main parties: a grantor, a trustee, and the beneficiary. The grantor, or person creating the Trust, appoints the trustee to manage assets before they are ultimately given to the beneficiary. These Trusts are typically used by those who have young children, with the assets being distributed after they reach a certain age, graduate, or get married. 

Types of Testamentary Trusts

Before looking at the various benefits of a Testamentary Trust, it can be helpful to understand the different types. There are two main forms to be familiar with:

  • Separate Trusts

  • Family Trusts

Separate for Children Testamentary Trust

When looking at how to set up a Testamentary Trust, separate Trusts simply means creating a specific Trust for each beneficiary. In many cases, this means creating separate Trusts for each child that equally split one’s assets. These Trusts are then managed and distributed individually, as opposed to all at once. 

Family Testamentary Trust

The other type of Testamentary Trusts are considered “pot” Trusts, essentially meaning all of one’s assets are managed together. Family Testamentary Trusts allow parents to distribute assets based on each child’s needs. These Trusts are typically used by parents who need or want to leave more funds to one child. For example, if there is a child with special needs who requires additional financial support. 

Benefits of a Testamentary Trust

You may still be wondering, “what are the advantages of a Testamentary Trust?” The answer is — Testamentary Trusts can be a great way to bolster your Estate Planning and ensure your assets are distributed according to your wishes. A few benefits of Testamentary Trusts to consider are as follows:

  • Asset Protection: The biggest benefit is thought to be the legal protection granted to one’s assets after death. These Trusts can protect assets against legal action or potentially irresponsible financial decisions made by beneficiaries.

  • Income Tax Perks: Testamentary Trusts do not require beneficiaries to pay taxes on income distributed from the trust. There are, however, income taxes to consider on undistributed income.

  • No Limit On Beneficiaries: There is not a limit to the number of acceptable beneficiaries when creating Testamentary Trusts. Additionally, with separate Trusts these accounts can be personalized.

  • Leave Pensions Unaffected: According to current pension rules, the amount set would not be influenced by the existence of a Trust or not. This means, your child would still be eligible for the same pension despite receiving funds from your estate.

  • Avoid Transfer Fees: Typically, there are not additional taxes taken when assets transfer from an executor to the trustee. Trusts can also help avoid taxes on any proceeds from life insurance payments.

Commonly Asked Questions about Testamentary Trusts

Now that we have covered the basics of testamentary trusts, we’ll get more detailed regarding different aspects of this type of Estate Planning. Read through the following to help answer your questions about Testamentary Trusts: 

Is a Testamentary Trust Revocable or Irrevocable?

A Testamentary Trust is irrevocable, meaning it cannot be altered after a certain point in time. Because a Testamentary Trust goes into effect after one’s death, at that point it can no longer be altered. This setup can be beneficial, as it prevents the assets from being potentially moved around and taxed repeatedly. 

Does a Testamentary Trust Avoid Probate?

A Testamentary Trust does not avoid probate — as the court will typically determine the Trusts authenticity and supervise the distribution of assets. For this reason, Testamentary Trusts may not offer the same level of privacy when compared to alternatives. Additionally, there are court fees associated with probate which all depend on the length of time it takes assets to be distributed. 

Is a Testamentary Trust Simple or Complex?

A Testamentary Trust is often a simple trust for taxes purposes. Generally speaking this means the trust cannot generate income, be designated for charity, or distribute out of corpus.

How to Set up a Testamentary Trust? 

Testamentary Trusts must be set up within a Last Will and Testament, so they can be created following one’s death. Once you have begun the estate planning process, you will need to designate a trustee and beneficiary. From there, you can specify which assets will be in the Trust and when they will be given to said beneficiary.

How does Testamentary Trust Taxation Work?

Testamentary Trusts are taxed as a whole, though beneficiaries will not be forced to pay taxes on distributions from the Trust. Note that you could be responsible for the capital gains tax, depending on your state.

Trusts are a crucial element to Estate Planning as they help provide more control over asset distribution after death. Among the various types available, a Testamentary Trust can be one of the best options for those thinking of their young children or grandchildren. These Trusts provide a number of benefits, such as the ability to establish certain milestones for beneficiaries before the assets can be taken. If you have any additional questions, reach out to us today or Chat with a live member support representative! 

Estate Planning is one of the most important things you can do to protect yourself, your family, and your future. Not sure where to start? Trust and Will can help! Explore what we have to offer


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