What You Need to Know About Testamentary Trusts

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The two most common types of trusts are revocable living trusts and irrevocable living trusts. But those are hardly your only options: Some people prefer a testamentary trust, which isn’t actually established while you’re alive but, instead, after your death. Not sure if it’s the right option for you? Read on to find out.

What is a testamentary trust?

Unlike a living trust, a testamentary trust isn’t established until after your death. In your will (or, more rarely, inside of another trust), you’ll spell out that you want the executor of your estate to establish a trust upon your death. Once established, it acts as an irrevocable trust; it can’t be changed. A trustee you’ve named will allocate assets of your estate to beneficiaries based on your wishes set out in the trust. So while you’ll obviously create your will while you’re alive, no property or assets are moved into the trust until after your death.

What are the benefits of a testamentary trust?

Like other types of trusts, testamentary trusts give you a lot of control over how your assets are distributed and when. Rather than leave your heirs a lump-sum inheritance, you can spread that money out over a period of years or earmark it for certain expenses (like education or medical costs or to help fund the down payment on a home). And these types of trusts can also block creditors from coming after your beneficiaries’ inheritance if they’re ever in debt or lose a settlement.

One unique perk of the testamentary trust is that they can be relatively inexpensive to create. While living trusts require their own paperwork (and accompanying attorney fees), the testamentary trust is actually part of the will. Outlining the trust can often be included in the fees you’d pay an attorney to establish your will.  

What are the drawbacks?

The assets in an irrevocable living trust aren’t included in your estate, which can mean significant savings on state and federal taxes and protection from creditors. But a testamentary trust isn’t funded until your death—so those assets are still considered part of your estate. That means they’ll have to go through the legal process known as probate and could be subject to possible estate taxes. How assets are distributed is also a matter of public record, which some people concerned with privacy won’t appreciate.

How do you set one up?

If you don’t already have a will, that’s the place to start. Contact an estate attorney to draw up a last will and testament, and he or she will also be able to help you outline the exact provisions for your testamentary trust. Most fees start at around $300, compared with the $1,500 or more to establish a living trust. You can browse estate attorneys in your area using our service finder:

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