A testamentary trust will not avoid probate. In order to understand why, it is important to first understand what exactly a testamentary trust is. A testamentary trust is different from a living trust. While a living trust is created during a person’s lifetime, a testamentary trust is created within a person’s will. Essentially, the testamentary trust does not even exist until the individual dies and its provisions are drafted in accordance with the grantor’s desires. Now, why would anyone choose this route as opposed to simply drafting a trust during the lifetime? Well, the answer may vary.
To begin, many individuals may avoid drafting a trust because doing so, while beneficial and relatively straightforward, does require some upkeep. That is, once a trust is drafted, the grantor—being the individual who placed the assets in the trust—must ensure that their accounts are transferred into the name of the trust. While not a difficult task, it is nevertheless an action that must be taken to properly fund your trust. Secondly, individuals that do not own a lot, or any, real estate and have few assets to be distributed upon their death may opt to draft a will instead that simply contains a “Testamentary Trust Provision.” Upon the individual’s death, this provision details who will be the executor of the estate and instructs the appointed executor to create the trust. Like a regular living trust, the person creating a testamentary trust can list anyone to be their trustee. Of course, this person should be one that the individual can rely on, and they are sure will manage their assets correctly and as wished. Moreover, while testamentary trusts are not created until after a person dies, this creation is not automatic as the will must go through the probate, just like any other will. Nevertheless, there are some benefits for choosing this route.
Why should I choose a Testamentary trust?
One of the main advantages of having a testamentary trust is that it allows for more control over the distribution of assets to the beneficiaries. The trust prevents legal action or people that would make erroneous financial decisions from handling your assets. There are also tax advantages, the biggest being that trusts are not required to pay tax on income that is distributed to beneficiaries. So, any income distributed to beneficiaries will not require a tax to be paid (but it is important to note that any undistributed income will require a tax to be paid). Having this type of trust also allows you to put a trustee in place that you are sure will follow the instructions laid out in your will. The trustee will also be given the power to distribute income to beneficiaries in the most beneficial way according to each person’s marginal tax rate.
Like most things that have advantages, there are also some disadvantages we must account for. Testamentary trusts may require costs of administering the trust. However, this is usually only the case if you decide to appoint a professional to administer your trust. Additionally, there may also be some tax implications that nevertheless apply and consulting with a financial adviser is wise to determine what exactly they may entail. Lastly and of course the most obvious, is that a testamentary trust will nevertheless have to go through the process of probate. Yet, the advantages that these types of trusts may be very attractive to some individuals and because there is an assigned trustee, the fact that probate is still necessary would be considered at most a process rather than a complete disadvantage of these types of trusts by some. While these are all important factors to take into consideration, it is best to advise with a trusts and estates attorney to provide you with more information on your options and the best one for you.
