Newland's Business Notes

Trusts in Wills: Too Costly?

Volume 9 Issue 1 -- January/February 2005

No, the title does not mean that you should have confidence in your Will.  What the title refers to is Trust provisions contained in a Will.  Let’s look first at the components of a Trust.

All Trusts have three major components:  (1) the Creator or Grantor, (2) the Trustee who performs duties and (3) the Beneficiaries, the people who receive the benefits of the assets in the Trust. 

Trusts that are created by provisions in a Will are called “Testamentary Trusts.” If the Trust is created independently of a Will, the term “Living Trust” is often used.  Since most living trusts are changeable, the moniker “Revocable Living Trust” (RLT), is commonly used for such trusts.

RLTs are effective when signed.  Wills, by definition, go into effect only when a person dies.  This truism is one of the basic reasons why many estate planners prefer RLTs over trusts in Wills. 

If the Trust provisions in a Will are designed to facilitate handling the assets of a disabled person, the Will cannot go into effect until the person dies. At that time, the deceased person would not benefit from such provisions, although his heirs may.

The assets placed in a Testamentary Trust after the person dies must first pass through a legal system called “probate.”  Probate, basically, is the administration of the assets of a decedent.

Let’s take an example.  Mr. X prepares a Will containing a Testamentary Trust for the benefit of X’s grandchild named Abe.  Abe is nine years old when Mr. X dies and the Will says that the assets of the Testamentary Trust for Abe are to be held in trust until Abe reaches age 25 (a period of 16 years).

The probate officials who are in charge of Will administration and Testamentary Trusts in Virginia are called Commissioners of Accounts.  In Virginia and many other jurisdictions, assets of the decedent may have to be used to pay for a commercial bond to insure that the Trustee of the Testamentary Trust performs appropriate duties and does not abscond with the Trust assets. 

Mechanically it works this way.  When someone dies with a Will providing for a Testamentary Trust, first the assets of the estate of the decedent have to be probated.  In other words, the funds have to be administered and accounted for in the probate system.  Once a required accounting is filed, then assets designated for a Testamentary Trust are placed in trust.  At this point, it may be necessary to obtain a commercial bond.

Often the family members will pay for the commercial bond, which can be comparatively expensive.  For example, in a recent estate handled by our firm, a Testamentary Trust of around $150,000 incurred annual bond costs of $370.  If the bond is posted for 10 consecutive years, then the total costs for the period would be  $3,700.  Conversely, if an RLT were used, and a commercial bond was not required by the provisions of the RLT, there would be no cost for annual bonds. 

Sometimes it is possible to pay a lump sum for the bond for the duration of the Trust period and get a discount, but that usually entails paying a large sum up front.  Advanced bond payments may be money wasted if, for example, a beneficiary should die prior to reaching the age of distribution.

There are various ways of protecting RLTs without the need for bonds and judicial supervision.  Perhaps the best way is to have a CPA review RLT disbursements every year.  Another way of providing a measure of protection would be to rely upon a mature person of a younger generation.

In addition to the bond costs, there is also the expense of preparing an annual accounting to the probate court for the Testamentary Trust.  Usually this will require the assistance of a professional, such as an attorney or CPA, thus causing a further drain on Trust assets. 

Thus, Testamentary Trusts are often not a good idea because of the additional costs and the need for the continuing involvement of professionals.  There is not anything inherently wrong with Testamentary Trusts, but anything that can be done in a Testamentary Trust can be done in an RLT, without the need to purchase a commercial bond.

If you need further assistance with regard to these subjects, call Newland & Associates.

Copyright 2005

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.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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