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Testamentary Trust

For Testamentary Trusts In S.E. Michigan Only: Call 248-676-2233 to make an appointment with an attorney.

This is a trust that is created by a person’s Last Will & Testament. Hence the name “Testamentary Trust.”

This type of trust, unlike a revocable living trust, only takes effect when the Settlor (Testator) dies. If the person making the will is leaving property to a minor at his death, some kind of trust is necessary because a minor is incapable due to age, immaturity or inexperience to properly manage the property. The person who owns the property for another person’s benefit is known as a “Trustee” and is also known as a “Fiduciary.” In no uncertain terms, the Settlor uses the will to instruct the Trustee to manage the trust assets for the benefit of the beneficiary.

It is worth noting again that the Will based Trust only takes effect upon the death of the Testator. This is in stark contrast to a revocable living trust that takes effect during life and the Settlor’s assets are transferred to the trust while the Settlor is still living.

See Also Special Needs Trust

Why a trust at all? There are some good reasons for creating a trust but not all persons will need either a testamentary trust or a revocable living trust. It all depends on the individual circumstances of the person contemplating his or her estate plan. Reasons for a trust:

  1. A trust can provide long-term management of assets for the beneficiary that cannot manage his or her own affairs. A person such as a disabled child could benefit greatly from a trust while preserving certain government benefits.
  2. A trust can provide temporary management of assets for a child who is not yet old enough to handle his own assets or for the surviving spouse who does not have the financial savvy to manage the family assets.
  3. A trust can provide asset protection and proper investment for elderly persons that may be suffering from dementia or Alzheimer’s disease. A trust can relieve them of the burden of trying to pay bills or make investment decisions.
  4. A trust can prevent assets from going through probate.
  5. A trust can help avoid paying federal estate taxes.

Under EPIC (Estates and Protected Individuals Code), once a trust is established, there is no need for continuing supervision by the court. Under EPIC, a will based trust is administered the same as a revocable living trusts. Testamentary trusts can be a good estate planning tool for the person who does not desire a revocable living trust. Testamentary trusts can also eliminate the need for a distribution to a guardian / conservator and the required accounting to the probate court.

Because the will based trust avoids the supervision problem of a guardianship, the trustee is afforded greater flexibility than is usually given the guardian or conservator. Management of the trust assets can be continued if necessary well after the minor beneficiary reaches the age of majority. In addition, if there are multiple minor beneficiaries, a common trust can be used instead of having a separate account for each child. A testamentary trust can also eliminate the need for a bond that is often required of a minor’s conservator.

Disadvantages of a Testamentary Trust:

  1. In order to establish the testamentary trust, it is required that the decedent’s will be admitted to probate.
  2. The terms of the testamentary trust could become a matter of public record. In other words, if the will is “published” then the terms of the trust are published also.
  3. There is no benefit to the Settlor if he or she becomes incapacitated. Again, the trust does not come into being until the death of the Settlor. In contrast, a revocable living trust provides for a successor trustee to manage the trust if the Settlor becomes incapacitated.

Trustees. Who should be the trustee of a will based trust? Since every trust must have a trustee (or co-trustees), a Settlor should consider the following factors:

  1. Honesty. The person selected should be honest. A trustee will be acting for the most part without any court supervision.
  2. Ability. The trustee should have the financial acumen to exercise good business and investment judgment. They should be good record keepers and have a knack for attention to details.
  3. Age and Health. As a general rule, don’t pick someone much older than yourself. The trustee should be expected to live to the termination of the trust which could span a generation. They should be in good health as well. This may not be a consideration if a corporate trustee such as a bank trust department is utilized.
  4. Venue. Where does the trustee live? The trustee should be near the beneficiaries and the trust assets. Probably not wise to choose a trustee living in Texas and the beneficiaries and assets are in Michigan.
  5. Family. Consider the feelings of the beneficiaries. Will they resent your choice for trustee? Does the prospective trustee care about the well being of the beneficiaries? If an adult child is selected for trustee over a disabled child, will the beneficiary resent the sibling having control of the beneficiaries assets?
  6. Independence. The trustee should be independent of the will and trust. In addition, the trustee should not be a beneficiary of the trust. If there are any federal estate tax problems, it may be best , if not necessary, to have a trustee who is independent of the family.

Other considerations to think about are: How and when will income and principal be distributed? Is a basic “health, education, support and maintenance” provisions be enough or is more detail needed? Should there be incentive provisions such as a sum of money for graduating from college? Should the child’s other income or resources be considered before a distribution is made?

A word of caution here. Estate planning is not a “do-it- yourself” project. I see kits on store shelves at Staples or Office Max or on television that tout how you can save money by creating your own will or trust and avoid attorney fees. The laws pertaining to wills, trusts, tax and probate are many and complex. A person may save a few hundred dollars creating their own estate plan but end up costing their family thousands of dollars by creating a worthless document that does nothing or worse yet, incurs serious tax consequences. Using pre-printed forms for estate planning is not recommended.

Compare Testamentary Trust to Trusts in general


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