Testamentary Trusts
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.
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
if 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.
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.
Copyright 2003
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and
tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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