Last Updated on March 14, 2023 by Tresi Weeks
There are various benefits to creating a testamentary trust. This article discusses the benefits of adding one to your estate plan.
What Is a Testamentary Trust?
A testamentary trust allows a testator to manage wealth by giving a trustee instructions for distributing their property after the trustee’s death. This is a part of the testator’s last will and testament and can also affect a special needs trust.
Wealth Management and Asset Protection
A testamentary trust helps with overall wealth management by protecting the testator’s assets after their death. This type of trust can be used to name minors as beneficiaries of the testator’s estate. A testator can use it to ensure that the beneficiaries only receive assets after they reach a specified age. This reduces the chance of waste or misuse of assets.
These trusts have tax benefits. For example, if assets are placed into this type of trust, the beneficiaries are not required to pay taxes on the income generated and distributed from the trust twice. This is known as double taxation. However, if the trust earns more than $600 in income per year, the beneficiaries may be required to file a tax return for that year.
There are also capital gains tax benefits to placing assets into a will trust. A person who sells an asset for profit may be required to pay a capital gains tax on the income generated from the sale. However, if legal ownership of an asset is transferred from one person to another , the capital gain received by the beneficiary is disregarded.
Keep in mind that testamentary trusts do not avoid probate. Probate is the legal process that courts use to ensure that the assets claimed by the estate are owned by the testator, that any creditors making claims against the estate have valid claims, and that the appropriate heirs receive the property listed in the trust. This means that estate taxes may not be avoided even if assets are placed into the trust.
There are many benefits of having a testimonial trust. Speak to a qualified tax professional or accountant to answer any questions you have about your tax obligations to find out more information.
Trust Terms Can Be Changed During the Testator’s Life
The terms of a testamentary trust do not become effective until after the testator’s death. If your needs change or you gain or lose assets, you can return to the trust and adjust it accordingly. The malleable nature of them is also helpful if you have more children or your marital status changes.
No Effect on Pension Plans
Creating a will trust does not affect your pension plan. If you name your child as a beneficiary of a testamentary trust, their access to their full pension plan benefits will not be affected.
Easy to Create
These may be the easiest estate planning tool to create aside from a last will and testament. They can be included in your will at the time you draft it or can be an easy addition to the document at a later date.