Testamentary Trust

website mmePreparing your estate plan, in particular a will or revocable living trust, allows you to give what you own, to whom you want, in the way you want them to receive it. Planning for the possibility of dying when your children are teenagers, you may want to focus most on the way you want their children to receive it. The prospect of a nineteen year-old inheriting a large home, ranch, retirement plan, and mutual fund account can be unsettling for some. In our estate planning, there is an option to use a powerful tool called the “testamentary trust” to protect the assets when our beneficiaries receive them and to give them flexibility with those assets. A testamentary trust is a trust that only comes into existence after your death. Your executor is tasked with setting up the trust according to the rules you provide in your will or revocable living trust.

The most common testamentary trusts are the child’s trust, the contingent trust, and the convenience trust, each with rules intended to achieve their particular purpose. When you die, the child’s trust receives your assets while giving the trustee, a person you designate, authority to use those assets for your child’s health, education, maintenance, and support. You designate how long the trust will last. We often see these trusts terminating between the ages 25 and 30. At that time, the child is working and expected to be a responsible steward of the assets. Often these trusts will include special authorization for expenditures to enable the guardian to be in the best position to take care of your child. This may mean using some of the trust funds to pay for an added bedroom at the guardian’s house or for the minivan the guardian now needs. These trusts also can provide bonus distributions recognizing your child’s achievements or milestones such as finishing school, getting a first job, buying a house, or starting a business. Some clients make their child a co-trustee when they reach 25, so that the child can work alongside the trustee to learn to manage their own assets.

The contingent trust protects a beneficiary who is under a disability that would prevent the beneficiary from owning and managing their own assets. Disability can include being under-aged. Typically the contingent trust will be used for a beneficiary such as a future grandchild, rather than your own children. The contingent trust terminates when the disability is removed or the beneficiary reaches an age that you designate. Again, we see clients select the ages 25-30 for a termination date on these trusts.

If the beneficiary determines that receiving an inheritance outright would be unwise, he/she can ask the executor to distribute the gift in trust, using the convenience trust provisions. Imagine that the beneficiary is going through a divorce or bankruptcy, or on a more positive note, is traveling abroad for a number of months. The convenience trust holds the inheritance for the benefit of your loved one, appoints a trustee for management of the assets, and keeps the assets out of the reach of your beneficiary’s creditors. The beneficiary determines when the trust will terminate by requesting a full distribution of the assets in trust.

Clearly, the terms of these testamentary trusts can be very personal. We discuss your goals and your understanding of your family as we help you develop the rules that will enable your executor to create these trusts, if they are needed. By including testamentary trusts in your will or revocable living trust, we help you provide the best care for your children and loved ones after you are gone.

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