Testamentary Trusts—What Are They, and How Can They Help Transfer Your Property?

Trusts are popular estate planning tools. Among other things, they can allow a more strategic approach to distributing assets. For instance, instead of a minor child turning 18 and receiving her entire inheritance from a parent or grandparent, the trust can specify milestones for disbursements. The milestones could include going to college, getting married, having children, and buying a house. 

Many types of trusts are available for estate planners, and one we often recommend estate planners consider is a testamentary trust.  A testamentary trust is sometimes called a Will trust. This is because a Last Will and Testament effectively creates the testamentary trust; it only goes into effect when the grantor passes away. 

How It Works

The executor or personal representative formalizes the testamentary and related documents. There is no need to create new documents, as the Will should contain the necessary provisions. The executor or trustee might need to get tax IDs for the trust and open bank accounts, though. 

The grantor will have chosen an individual or entity to act as the trustee. Trustees are responsible for following the trust’s instructions for distributing assets to the beneficiary. Trustees might also be tasked with managing investments and maintaining appreciable assets. 

However, the trustee does not own the assets placed in the trust. The trust is the legal owner of the assets. As a result, the beneficiary might enjoy some degree of protection over the trust’s assets. For instance, the assets in a testamentary trust might be safe from a divorce decree or lawsuit. Trusts provide various levels of asset protection depending on the type. 

Reasons to Create a Testamentary Trust

As we explained above, a testamentary trust can allow the grantor flexibility and creativity when it comes to distributing assets to a beneficiary. That’s not the only potential benefit of testamentary trusts, though. You may use them to ensure children from a previous marriage receive their inheritances without going through your surviving spouse. 

Another reason for creating a testamentary trust is for the benefit of special needs individuals. If someone on Supplemental Security Income or Medicaid receives assets over a certain amount, he or she could lose those public benefits. The assets funded into a trust do not count as assets owned by a special needs individual.

For tax and other reasons, grantors often create testamentary trusts as the beneficiary of their life insurance policies. This can be effective, but the rules surrounding life insurance and trusts are quite complicated. Anyone considering a testamentary trust for their estate plan should speak to a qualified Texas estate planning attorney. 

Albright & Lumpkin, PC has locations in Houston and League City. For any questions about our services, please call us at (281) 736-1324. We look forward to hearing from you!

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