A testamentary trust is created by a will and administered by a trustee for the benefit of named beneficiaries. It is important to choose beneficiaries and trustees, structure the trust, and protect it from legal and tax challenges. Testamentary trusts can provide regular income and care for minor children or disabled individuals, appoint a trustee to manage assets, and reduce the impact of taxes on the estate. Probate trusts are useful for married couples with joint property that exceeds the allowable unitized credit value, while trust releases offer flexibility to adapt to changes in tax laws and unified credit amounts.
A testamentary trust is a trust produced by a will that an administrator will administer for the welfare of one or more beneficiaries named in the will. By definition, a testamentary trust will not exist until the death of the individual creating the will, the testator. Important steps in establishing a testamentary trust include determining the beneficiaries and trustees, establishing a will, choosing the structure of the testamentary trust, and structuring the language in the will to protect the trust from all potential legal and tax challenges after the death of The Testator. It is essential for anyone wishing to establish a testamentary trust to meet with an experienced estate planning attorney. Testators will also need to know what the federal estate tax laws allow for the unified credit in order to determine if the value of the total assets in the estate justifies a testamentary trust.
When making a will, a testator may have several reasons for establishing a testamentary trust. Most commonly, living trusts offer a means for the testator to provide regular income and care for minor children or people with disabilities after the testator’s death. A testamentary trust also provides for the appointment of a trustee responsible for the assets, who will manage and oversee the disbursement of income and principal to beneficiaries, make charitable gifts, and preserve assets for future distribution. By maximizing the use of pooled credit, testamentary trusts also reduce the impact of taxes on the value of the estate. If there is more than one beneficiary, the will should establish a separate testamentary trust for each beneficiary to ensure the lowest possible tax bracket for each cohesion.
Probate trusts, also called bypass trusts, are particularly useful for married couples with joint property that exceeds the allowable unitized credit value. For example, if the consolidated credit is $3 million United States Dollars (USD), each deceased partner can give $1.5 million tax-free to a trust. The surviving spouse still has unlimited access to the income generated by the trust, as well as access to the principal for expenses related to health, education, maintenance and maintenance (HEMS). However, if the spouse does not require the $1.5 million in trust, the principal can pass to the beneficiaries tax-free. When the spouse dies, an additional $1.5 million can be put aside tax-free from the estate, assuming the consolidated credit hasn’t changed.
Alternatively, a testamentary trust can take the form of a trust release. When a liability waiver trust is established, the will delivers all assets to the surviving spouse, but the spouse, after evaluating the financial outlook, may relinquish or reject part of the property within nine months of death. Any rejected assets are transferred to the trusted bypass. In this way, the spouse has the flexibility to directly transfer the assets to the trust based on the current financial landscape. The trust disclaimer also allows the spouse to adapt the trust funding to any changes in tax laws and unified credit amounts.
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