Many factors motivate individuals to start their estate planning. Many testators or trustors cite their desire to care for their loved ones after they’re gone as the reason for drafting their wills and funding trusts.
A testamentary trust may allow you to take care of your loved ones’ needs once you pass away. You’ll want to compare different options to see if it’s the best one for you, though.
How do testamentary trusts work?
Testamentary trusts go into effect when a trustor dies. Individuals can set up this type of trust when drafting their will.
You’ll need to designate which assets go into the trust upon your death. You don’t have to place all of your assets into a single trust but can instead create multiple testamentary trusts and place various pieces of property into each one.
There are steps that you’ll need to follow when setting up a testamentary trust. You’ll need to:
- Appoint a beneficiary
- Draft trust administration instructions
- Decide which assets to fund it with
You’ll also need to appoint a trustee that will manage the trust and make distributions to your beneficiaries as per your instructions.
How testamentary and living trusts differ
You shouldn’t confuse a testamentary trust with a living trust. Living trusts can go into effect the minute the trustor creates them. Testamentary trusts, as highlighted above, are set up to go into effect after a trustor’s passing.
Another distinguishing factor between the two is that the trustor can change the former until their death. There are two types of living trusts; irrevocable and revocable. A trustor cannot modify the former, whereas they can alter the latter type.
Many individuals set up living trusts because it allows them their estate to bypass the probate process. They’re able to avoid this because they transfer their assets into the trust while they’re alive. A testamentary trust doesn’t help a trustor’s loved ones bypass the probate process as they retain control of their assets up until their passing.
Trusts can be complicated estate planning tools to understand. There may be some additional tax implications associated with setting one up that you’ll want to discuss with an attorney to ensure it’s the right choice for you and your family.