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Unlocking the Power of Testamentary Trusts in Your Estate Planning

One of the primary motivations behind creating a revocable living trust, a trust established during your lifetime that you can modify or revoke, instead of relying on a will to distribute your assets to beneficiaries, is to sidestep probate. Probate is the court-supervised process during which a will is validated, and your assets are allocated to the individuals or organizations named in your will. However, there are both advantages and drawbacks to probate. After weighing these considerations, some individuals may opt for a testamentary trust, which is a trust established through a will. This choice might entail that your assets go through probate before the trust is funded and assets are distributed to beneficiaries. There are other compelling reasons why a testamentary trust could be a fitting option, such as the ability to direct distribution amounts and timing for beneficiaries and lower upfront costs associated with trust creation.

To Avoid or Embrace Probate: That’s the Dilemma

When deciding whether a testamentary trust aligns with the best interests of your family and loved ones, it’s crucial to ponder whether avoiding probate is a top priority. The pros and cons associated with probate may vary according to your jurisdiction and the size of your estate.

The fees associated with your estate during the probate process can fluctuate depending on your estate’s size and complexity, as well as state laws governing court filing charges. In some states and for larger estates, probate can be a costly affair. Throughout probate, an estate may need to cover court expenses, executor’s fees, attorney fees, accounting costs, appraisal and valuation expenses, a probate bond, and other miscellaneous fees. These expenditures can accumulate quickly, diminishing the amount ultimately received by your beneficiaries. Yet, for smaller estates and in certain states, the probate process may be relatively inexpensive and may not be a significant factor in determining whether to opt for a will that establishes a testamentary trust upon your passing instead of a revocable living trust.

Moreover, based on each state’s established procedures and estate complexity, probate might be time-consuming and delay fund distribution from the testamentary trust for a period spanning months to years. In states with expedited probate procedures for various scenarios, this may be of lesser concern.

Given that probate is public, some documents, such as your will and information regarding the testamentary trust it institutes after your death, can be accessed by any member of the public, eroding privacy. Consequently, personal information about your family and other beneficiaries, encompassing inheritances and the types of assets and property they inherit, becomes public knowledge. In contrast, a revocable living trust remains private, safeguarding the identities of your beneficiaries and estate details.

Since probate is a court-administered process, it entails oversight by a judge or court clerk until all distributions are completed. Trustees of a testamentary trust might need to convene regularly with the probate court, which monitors trust administration until the trust terminates. While some might view this oversight as burdensome, others may find it reassuring, as it offers additional assurance that the trust will be administered as per your intentions.

Retain Control Over Asset Distribution

Under a will, beneficiaries typically receive assets immediately as soon as probate court authorizes distributions (except for minor children, whose inheritance might be held in a custodial account until they reach the age of majority). However, the inclusion of a testamentary trust in your will empowers you to specify the timing and amounts of distributions to beneficiaries. Even though a testamentary trust is established upon your passing, you delineate trust instructions in your will while you’re alive, which can be altered anytime.

A testamentary trust can be particularly beneficial for parents of young children, adult children grappling with creditors or spending issues, or disabled children who require ongoing support while maintaining eligibility for government benefits. It can also offer protection to beneficiaries in the event of divorce by preserving their inheritance during asset division. The trustee named in your will has a duty to dispense assets in accordance with your will’s instructions. Consequently, you can provide your family members with resources as needed until the trust’s termination. You can specify whether the trust should endure until your children reach a certain age or attain a specific milestone. Furthermore, you can determine the purpose of distributions, such as covering health, education, maintenance, or support expenses for your children.

Defer Trust Creation Until Your Passing

Typically, creating a revocable living trust is costlier. Hence, if you aim to minimize current expenses but believe that a trust will ultimately benefit your family and loved ones, a testamentary trust presents a viable cost-effective option. A testamentary trust is created and funded after your passing, with the associated expenses covered by your estate. Consequently, it offers a more affordable alternative during your lifetime. It also implies that you won’t need to transfer ownership of accounts and property during your lifetime since this process forms part of trust funding posthumously. Your wealth might have an opportunity to grow over your lifetime, and your estate may be better equipped to cover expenses after your passing.

Seek Professional Guidance

Both revocable living trusts and testamentary trusts offer benefits that can ensure your wishes are honored and your loved ones are looked after. If you’re uncertain about the type of trust to incorporate into your estate plan, reach out to us for guidance. We can help you make an informed decision that best aligns with your unique circumstances.

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