Testamentary Trusts: The Good and the Bad

A testamentary trust is not applicable until (1) you pass away, (2) your will is successfully admitted to probate, and (3) the trustee establishes a trust account with funds delivered by the will’s executor. But what kind of property should you have distributed via these trusts?

The advice of many estate planning attorneys is to transfer as little as possible by will: Probate requires:

  • a good deal of paperwork
  • notice to a potentially large number of familial and beneficial parties,
  • a court clerk approval of submission of the will,
  • the court’s over-all approval, etc.

Probate also has a sliding scale for court filing fees, is a public affair, and takes a good deal of time to administer. Meanwhile, transferring property directly to a person through a proper beneficiary designation form or Transfer on Death account will bypass probate because we know who is receiving the property upon death. A will only transfers property for which a beneficiary is not readily apparent without a will.

However, there are appropriate times to transfer funds by a will’s testamentary trust, for example in a case involving a minor. . Minor children cannot legally receive property in their name, which includes proceeds from a life insurance policy or bank account. Further, naming a minor as a joint tenant on a bank account could potentially lead to a Guardianship Proceeding, which is an expensive proposition because the court appoints an attorney to handle the child’s financial affairs and sticks your estate with the bill.

Another example in which a testamentary trust is appropriate is in the event that the beneficiary has creditor issues. In this case an outright transfer could lead to a creditor snatching a large portion of funds left outright. Or maybe the beneficiary is a spendthrift who cannot responsibly handle large sums of money. Testamentary trusts can address both issues by naming a trustee who can negotiate against creditor demands and control distributions to beneficiaries.

Lastly, on rare occasion a person may actually want court oversight of the property, such as when the client thinks one beneficiary will abscond with estate funds.

Again, the general feeling is that Probate should be avoided where there are responsible beneficiaries, in which case there are other methods to transfer property at death. As such, a client should be weary of working with an attorney who automatically suggests a will and does not discuss other options with the client. However, if the practitioner can suitably explain why the will is the preferred asset transfer mechanism, the client should probably take the advice they are given: The lawyer knows his stuff.

Q FOR YOU: Does your existing will contain or refer to a trust that it creates?

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