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The Plain English Attorney

Testamentary Trust

A testamentary trust is basically language written into a Last Will and Testament that holds and manages estate assets for a beneficiary over a period of time beyond the probate estate being initially settled. Unfortunately, this has a lot of drawbacks depending on state law.

A testamentary trust may mean that the beneficiary’s share has to be supervised and overseen by a court until all of the money has been distributed. So if a 5-year-old grandchild gets an inheritance through a Will to be held in trust until they turn 40 could mean 35 years of reporting to a court by the trustee to show where each and every penny went. Basically, it is extended probate for those beneficiaries’ shares. Most of my clients come to me because they want to avoid the probate settlement process by using a Revocable Living Trust, so they often see even less value in setting up a testamentary trust through a Last Will and Testament where red tape reporting to a court could drag on for decades.

What about any money left over in a Testamentary Trust if the beneficiary dies before receiving it all? When it comes to who gets the share, that is done according to the terms of the Will/testamentary trust. Often, the person whose Will it is specifies the contingent beneficiaries. For example, it is extremely common for trusts that leave a share to their child to then direct that if all of the assets aren’t distributed before the beneficiary dies that it will go to the child’s descendants and not their spouse, even though most people in their own plans would designate their spouse as their primary beneficiary. Sorry to all of the sons-in-law and daughters-in-law out there, but most people care more about their own children and grandchildren far more than you. But that’s OK because your parents often care more about you and your children than your spouse.

But what about Trustee powers?

These can be drafted into the testamentary trust, but state law is often the foundation and can take over where the document is silent. (Years ago I sat through a 2.75 hour Continuing Legal Education class that covered something like 187 changes to trust law over the past year… 185 of them were “well, if the trust doesn’t say, then here is what will happen.” The other two were about very specific tax breaks for trusts.) Basically, the way to think about trustee powers is that state law will dictate all of the different powers that a trustee has and all of the powers they are denied by default, but there are a lot of terms (but not all) that you can customize. This is why you may see a lot of testamentary trusts that have very few actual provisions related to trustee powers because state law will “fill in the gaps.”

The fact is that drafting Wills and the ancillary documents is less expensive than drafting a Revocable Living Trust and all of the accompanying documents. However, if after an education process my clients come to the considered decision to still use Wills, then that’s their choice and I’m not going to second guess them. I would absolutely agree, though, that a lawyer that doesn’t at least counsel and provides information to their clients on Revocable Living Trusts as an alternative to Wills is falling down on the job. Another point is that if the client starts wanting to customize the terms of the testamentary trust to the point that the cost of the Will package starts to look similar to a revocable living trust, then why not just do the trust and avoid probate at the same time?

In many cases, younger clients without any special circumstances may come to the conclusion that they want a Last Will and Testament and related documents “for now.” But by and large, the clients who come to me want to avoid probate for their estate plan and gain all of the other advantages of a revocable living trust. And many of the younger clients come back to create a revocable living trust later. To learn more about the differences in estate techniques, check out the free webinar at http://www.Trust101Webinar.com.

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