ANOTHER Reason Wills are Cruddy: Testamentary Trusts
Yep, I’m here to bash on New York Probate and Wills again, so if you love large legal fees, Court intervention and long waits for unnecessarily complex services, you may want to start watching your favorite rerun of Better Call Saul now.
What would you say if I told you that after going through the many annoyances of Probate you may still be stuck working with the Court for another 20+ years? I’m guessing the words would be colorful, like the post credits scene of that night in college you tried Jello shots. Yes, when you use a Will to protect assets you transfer to other friends and family members, your Executor or Trustee and the Court get to be best buddies again when trying to administer to your Testamentary Trusts.
Remember that Testamentary Trusts are a part of your Last Will and Testament, they are not a part of your Living Trust (which is a separate document from your Will). While Living Trusts avoid the need to go through Probate, transferring assets through the trusts in your Will absolutely require Probate, as Testamentary Trusts cannot be created without the Will being validated by the Court. But that is just the beginning of potential problems:
- Court Action is Required to Name a Successor Testamentary Trustee
If specific trustees are not named after your initial trustee of any Testamentary Trust, a beneficiary will have to apply to the Court to name a new Trustee. Yes, most Living Trusts allow for the appointment of a Successor Trustee without Court involvement. But as already discussed, Testamentary Trusts are governed by the Court, which shall need to be petitioned to create a Successor Trustee of a Testamentary Trust. Even worse, if the last-named Trustee dies you may first need to start a Probate proceeding for the deceased Trustee before you can even petition the Court to name a Successor Trustee.
- Testamentary Trusts Are Stuck in New York’s Surrogate’s Court
It may sound weird, but not every type of case has a specialized Court you need to bring a proceeding in front of. It may sound even more weird that the entry level Court in New York (I.e., the “lowest” level in the Court’s hierarchy) is call the New York Supreme Court. The reasoning is that this Court has “supreme” jurisdiction to listen to any type of case (though I assumed the Court naming system was introduced when NYC still used lead in its piping). In certain cases, including when there are issues with a Living Trust, you can choose whether to bring your matter to New York’s Supreme Court or its Surrogate’s Court. This is convenient if the applicable County’s Surrogate’s Court is overwhelmed with work or is transitioning between different judges and clerks.
Not so with Testamentary Trusts: Once a Will is admitted to Probate all of that Will’s future legal actions (except under rare circumstances) are brought to the same Court, so no Court shopping is available.
- Additional Updating of Life Insurance & Retirement Plan Beneficiaries
What if you did the right thing the first time you created your Will by properly updating your beneficiary designation forms for your life insurance policies and retirement plans to leave the funds to your Testamentary Trusts? That’s great, but if the beneficiary designations are too detailed (Example: “The Trust for My Descendants Under Section VII of My Will Dated June 2, 2016”) and then you created a new Will in 2022 and also change the Section number, the beneficiary forms ALL need to be updated or lapse into your Residuary Estate. Under some circumstances this may require a bit more paperwork and convincing the Plan Administrator or financial Custodian to treat the assets under sophisticated estate and income tax rules, but under other circumstances it may totally rearrange your Estate Plan by leaving money to wrong beneficiaries and accruing more taxes. No, No Bueno.
What is the alternative? Living Trusts. Living Trusts create their own trusts upon your passing which avoid Probate if the trusts are properly funded. Yes, if you are young and just need a legal band aid to transfer your estate to your minor children and name a guardian, Wills with Testamentary Trusts are the mandatory minimum document you should create. And yes, there are additional legal fees and time commitment on your part, and if maximizing your estate’s resources is not a priority to you, then using Testamentary Trusts in your Will to securely transfer your property to loved ones is your choice.
But if you want to have a final divorce from the Surrogate’s Court and avoid the need to update beneficiary designation forms when you change your estate plan in the future, Living Trusts are better than Testamentary Trusts 100% of the time.
