Testamentary Trusts: The Best of Both Worlds?

The Role of Testamentary Trusts in Estate Planning Strategies

You have several different options when it comes to creating the right estate plan for you and your family. Contemporary estate planning attorneys generally recommend a revocable living trust as the ideal tool for most families. Some others prefer the sometimes simpler “tried and true” use of a Last Will and Testament as the foundational piece of an estate plan. In some circumstances, a middle way is preferred; the use of a testamentary trust that combines elements of both styles of planning. In this post, we’ll explore them as an option and consider the circumstances under which they might be a useful tool in your estate plan.

What is a Testamentary Trust?

A testamentary trust will own accounts and property owned by you in your sole name without beneficiary designations, upon your death and enables you to instruct how your money and property will be handled in advance. Unlike a revocable living trust (which is typically created and funded with assets during your lifetime), the testamentary trust is created at your death, and ownership of your accounts and property are transferred to the trust through the probate process.

Why Use a Trust?

Depending on your circumstances, your loved ones may need the extra protection that a trust can provide.

Surviving spouse. Some couples are hesitant to leave everything to their surviving spouse out of fear that the surviving spouse could be taken advantage of, remarry, or otherwise lose the money and property that was left to them. A trust can allow a surviving spouse to access the money and property while including extra protections to safeguard it.
Minor child. In most states, minor children cannot legally own anything. If money and property are left to a minor, the court may need to appoint someone to manage the inheritance and ensure it is used appropriately. A trust allows you to select the person to manage the inheritance and provide specific instructions about how the money and property should be used.
Special needs individual. If you have a loved one who is currently receiving or may need to avail themselves of certain government benefits due to a disability, a poorly structured inheritance can jeopardize their ability to qualify or keep those government benefits that they need to survive. A properly structured trust can provide funds to your loved one to supplement what they are receiving from the government without disqualifying them from government assistance.

Probate: a Primary Set-back of the Testamentary Trust

The above benefits are just a few of the reasons many families choose to use a Trust as a tool in estate planning. Both a revocable living trust and a testamentary trust can be drafted to include the types of strategies outlined here. When using a testamentary trust, however, the probate court will still have to be involved. This is because a testamentary trust only comes into existence after your death—during the probate process. The person you name as your personal representative (sometimes referred to as an “executor”) will oversee changing the ownership of your accounts and property from you as an individual to the trustee of the testamentary trust. Once ownership of accounts and property has been changed, the trustee will manage the trust according to the instructions in the will for the trust’s duration. When all of the accounts and property have been given to the intended beneficiaries, the trust administration terminates. During the administration, the trustee may be required to provide annual reports to the court and other important parties and may have to periodically appear before the judge.

So Why Use a Testamentary Trust?

If a Testamentary Trust doesn’t help avoid probate, why would anybody use them? Because the probate process can be time-consuming, expensive, and public, many families try to avoid probate by using Revocable Living Trusts as the foundational piece of their estate plan. However, a testamentary trust that requires probate may be the right option in some limited circumstances.

For example, when leaving assets to a spouse with special needs, it is important to consider whether the inheritance will disrupt a love one’s eligibility for certain government programs (such as Medicaid). In certain circumstances, it can be helpful for the beneficiary’s inheritance to come through a trust that was created after a spouse’s death. (If you think this situation may apply to your family, we recommend you contact an experienced attorney. Many times—though not always—this type of planning can be incorporated in a revocable living trust).

Additionally, some people find that the probate process provides added stability and harmony by allowing a third party (the probate court) to oversee the process. The probate process often adds costs and administrative headaches to an estate administration, but it can also be helpful to families that may otherwise argue over the details to remain cordial and on their best behavior.

Do Not Forget Other Important Documents

Even if you choose to include a testamentary trust as part of your will, there are other important estate planning tools you must have to properly protect yourself and your loved ones. Because a will only covers what happens to your money and property when you pass away, we must also plan for a situation in which you are alive but unable to make your own decisions, which is known as incapacity.

Financial Power of Attorney

A financial power of attorney allows you to choose a trusted person (the agent) to handle your personal financial matters without court involvement. The amount of authority your agent has is determined by the type of financial power of attorney you have prepared. It can be as limited or as broad as you would like. Another important consideration when preparing a financial power of attorney is choosing when the agent can act. One option is to enable the agent to act immediately once you have signed the document. A second option is to have a springing financial power of attorney that only becomes effective once it has been determined that you cannot manage your affairs. It is important to note that some states do not allow springing powers of attorney.

Medical Power of Attorney

A medical power of attorney allows you to appoint a trusted person as a decision-maker to communicate on your behalf or make healthcare decisions for you without court involvement.

Advance Directive or Living Will

An advance directive or living will allows you to convey your wishes regarding end-of-life decisions, such as how long to continue artificial hydration and nutrition or how long to continue artificial respiration when you are in a persistent vegetative state or have a terminal condition and with no chance of recovery. This document will help the decision-maker under your medical power of attorney make informed choices for your care.

HIPAA Authorization

A Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorization form allows you to grant specific individuals access to your confidential and protected information (e.g., to get a status update on your condition or receive your test results) without giving those individuals the authority to make decisions on your behalf. Providing this information to your loved ones can help all parties stay on the same page even if only one person is authorized to make medical decisions on your behalf.

Nomination of Guardian

Some states have a separate document that allows you to nominate a guardian for your minor child. Some people prefer the separate document because they can change guardians with ease and without having to update their entire will or pour-over will. This document can be referenced in your will so that your nomination will be known during the probate process.

Temporary Guardianship

Some states allow for a separate document in which to name a person to make decisions for your minor child when you are unable, such as if you are incapacitated or traveling without your child and need to give someone authority to make decisions for your child in your absence. It is important to note that this document is only effective for a short period (typically six months to a year), and a temporary guardian cannot agree to certain actions, such as the child’s adoption or marriage.

Let’s Choose the Right Option for You and Your Loved Ones

There are many different options when it comes to crafting a plan that is right for you. At Gunderson Law Group, we are committed to developing a plan that protects you, your loved ones, and your legacy. If you are interested in learning more about testamentary trusts or reviewing your existing estate plan, please contact us today.