Should you consider a testamentary trust?
There are all kinds of situations where a testamentary trust makes sense, but it all boils down to the same goal: protecting your family after you die. The question is: Is it right for you?
Read on to learn more.
What is a testamentary trust?
A testamentary trust is a trust you create in your will that goes into effect after you die.
The trust can contain all or part of the assets you plan to leave behind, depending on what you want to do. The trust acts as a kind of manager and custodian. It ensures that your beneficiaries receive exactly what you want them to receive, following the instructions you provide.
Generally speaking, it's not worth creating a trust unless you have a net worth above a certain level.
When is a trust a good idea?
A testamentary trust acts as the custodian of your estate's assets. Its job is to protect your beneficiaries, which means it can be a good idea if any of your heirs include:
- A child who is still a minor, who has a disability or incapacity, or who has addiction issues
- A child who has reached the age of majority but who may still be too young to manage a sizeable inheritance
- A child you share custody of
- A spouse who isn't a parent of your children, or who isn't able to manage an inheritance
What's it for?
There are 2 main things a testamentary trust can be used for:
1. To spread out inheritance payments over time
Instead of transferring everything to your heirs all at once, you can make arrangements to spread out payments over time or help them manage their inheritance. For example:
- For a minor child or young adult:
- Plan what they'll need for their education in the first few years of the trust, and then give them full control over their inheritance once they've reached a certain age.
- Bypass the requirements involved in leaving an inheritance of over $10,000 to a minor child.
- For a child suffering from addiction (gambling, drugs) or facing other issues (debt, cult, etc.)
- Dole out the inheritance over time so they don't burn through it all right away, and protect them from outside financial pressure or influences.
2. To act as a backup estate plan
What will happen to your estate if one of your heirs dies? For example, you probably want to protect your spouse-but if he or she dies after having remarried, you'd probably want the rest of your money to go to your kids, not the new spouse.
With a trust, you can plan for different scenarios to make sure your wishes are respected, no matter what happens after you die.
What does it cost?
As the saying goes, nothing in this life is free! It's hard to come up with a detailed estimate of what a testamentary trust will cost, since it all depends on the size and complexity of your estate and the exact arrangements you want to set up.
That said, let's take a look at some of the costs involved:
- Drafting a will that includes a testamentary trust
- Cost: Between $1,500 and $5,000
- Filing annual financial statements and income tax returns for the trust
- Cost: Anywhere between a few hundred dollars to a few thousand, depending on how complex the trust's assets are
- Arranging for professional wealth management or other specialized services (if the size of your estate warrants it)
- Management fees: Generally calculated as a percentage of the assets managed by the trust. That means they'll decrease over time as the estate is distributed.
You can also decide to appoint a surviving spouse or child as trustee, as long as there's second trustee who isn't also a beneficiary in your will.
There are a number of factors that go into deciding whether or not to set up a testamentary trust. That's why it's a good idea to conduct a thorough analysis of your finances that takes into account your personal situation, your family, and the tax impacts of your estate.