Although it is very common for people to leave their assets to their heirs outright, with no strings attached, you can set up an alternative to your heirs receiving 100% of inheritance outright. By including testamentary trust provisions embedded within your living trust, upon your death your living trust can regulate the transfer of assets (including principal and/or income) to heirs who are prone to mismanagement, who may quickly squander their inheritance, or who may be subject to creditors or an ex-spouse.
Testamentary Trust Provisions
Proper testamentary trust provisions can protect dependents with special needs while also ensuring their continued qualification for government assistance and benefits. Other benefits of a living trust containing testamentary trust provisions are ensuring family assets remain in your family, and if desired, ensuring your son-in-law or daughter-in-law will not be able to redirect your grandchildren’s inheritance to a new spouse or to children of another marriage. The living trust can also prevent unintentional disinheriting and other hidden pitfalls associated with joint ownership.
What is a Testamentary Trust?
A testamentary trust is an irrevocable trust created automatically upon your death in accordance with the terms of your living trust. Unlike the living trust which is created while you are alive, the testamentary trust springs into effect only after you die. One of the primary benefits of a testamentary trust is that you can easily amend the testamentary trust in any way you wish while you are still alive, including changing the trustee(s), the beneficiary(ies) and/or the allocations and timing of distributions. If your children have finally reached an age where outright distribution of assets is warranted (makes sense/desirable), or he/she is no longer married to that “crazy” spouse, or no longer has creditor issues, you can easily amend the age at which distribution will occur, or remove the restrictions altogether. After your death, the trustee is the person who manages the trust for the beneficiary and is in charge of distributions to the beneficiary.
Protect Your Children
If you have minor children, the living trust will legally designate a guardian of your choice who will care for your children if you die. While you are alive you can easily make amendments to change the guardian and the trustee of the testamentary trust. The testamentary trust trustee and guardian can be the same person, or they may be different persons. Over time, relationships can change, people may relocate to distant places, and needs of beneficiaries may change. For these reasons a living trust with an embedded testamentary trust may be the perfect estate plan for your young children or adult children where total outright distribution to them may not seem prudent. This method will protect life insurance proceeds as well, by simply naming the trust as the insurance beneficiary, or contingent beneficiary after your spouse.
Even if you do not have children, you may wish to leave some of your assets to a niece or nephew, and with testamentary trust provisions, their inheritance can be distributed over time, or withheld until a certain age. And with a testamentary trust, as long as you are alive, you can easily change the amount of assets allocated to a beneficiary, or even change the beneficiaries altogether if circumstances warrant. Although a testamentary trust is also commonly embedded within a will, the will would have to go through probate before the testamentary trust can spring into effect. On the other hand, a testamentary trust embedded within a living trust entirely avoids probate. A testamentary trust may also be referred to as a children’s trust, minors trust, or family pot trust.
Proper planning minimizes the potential for hard feelings among family members, since your intentions are clearly stated. You will have taken steps to minimize paperwork for family members at times when family should be able to concentrate on supporting one another emotionally, rather than worrying about probate or guardianship concerns. Estate planning is difficult to gift wrap, but truly is a great gift to your family.
Michael K. Elson is an estate planning, wills and trusts attorney located in Encino, with a satellite office in Valencia. He provides estate, business and asset protection planning, including trusts, LLCs, corporations, probate, and trust administration and may be reached at (818) 763-8831 or by visiting http://www.LimitLiability.com This article is a broad overview of some estate planning options. Since each person’s circumstances are unique, and there are many intricate exceptions in the law, the mere reading of the material herein does not create an attorney/client relationship between the author and the reader.
Reprinted with permission of AOA (Apartment Owners Association, Inc.) and the author.
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