CandleFocus Glossary Editor
A testamentary trust is a trust initiated upon the passing of a testator. The trust is established by the language that a testator has put in his or her will and is typically used as an estate planning tool. Testamentary trusts are one of the most popular and flexible estate planning options available, with many different benefits.
Most commonly, a testamentary trust is used to provide for the management and distribution of assets to minor beneficiaries. The trust will outline when and how the assets should be distributed, ensuring that the beneficiary receives the assets at the right time and in the right form. For example, the trust may specify when the beneficiary will receive full access of his or her inheritance — say, at age 21 — and also determine whether the assets should be received as income or as a principal.
The testamentary trust also allows significant flexibility in estate planning and tax-reduction strategies. Since the trust could be set up to name multiple beneficiaries, each of whom would then receive the trust assets in particular ways, it provides the testator with considerable control over how the estate will be distributed upon the testator's death.
In addition, testamentary trusts are often used for tax-reduction purposes. By naming someone to manage the trust, the inheritance taxes may be reduced as the trust payments would occur at a lower rate than if the beneficiaries were to receive the assets directly. This can be especially helpful if the beneficiaries are in a higher income bracket than the testator, thus reducing the overall cost of estate taxes.
In spite of its many advantages, a testamentary trust is not without its drawbacks. The most significant disadvantage is that the trust does not avoid probate - the legal process of distributing assets through the court. Further, there are also fees associated with setting up and administering a trust, which can cause the overall trust fund to shrink.
Overall, testamentary trusts offer estate planners reliable and effective methods of estate planning and transfer of assets. The complexity and flexibility of such trusts allows for potential tax savings, asset management and increased control over the estate upon death.
Most commonly, a testamentary trust is used to provide for the management and distribution of assets to minor beneficiaries. The trust will outline when and how the assets should be distributed, ensuring that the beneficiary receives the assets at the right time and in the right form. For example, the trust may specify when the beneficiary will receive full access of his or her inheritance — say, at age 21 — and also determine whether the assets should be received as income or as a principal.
The testamentary trust also allows significant flexibility in estate planning and tax-reduction strategies. Since the trust could be set up to name multiple beneficiaries, each of whom would then receive the trust assets in particular ways, it provides the testator with considerable control over how the estate will be distributed upon the testator's death.
In addition, testamentary trusts are often used for tax-reduction purposes. By naming someone to manage the trust, the inheritance taxes may be reduced as the trust payments would occur at a lower rate than if the beneficiaries were to receive the assets directly. This can be especially helpful if the beneficiaries are in a higher income bracket than the testator, thus reducing the overall cost of estate taxes.
In spite of its many advantages, a testamentary trust is not without its drawbacks. The most significant disadvantage is that the trust does not avoid probate - the legal process of distributing assets through the court. Further, there are also fees associated with setting up and administering a trust, which can cause the overall trust fund to shrink.
Overall, testamentary trusts offer estate planners reliable and effective methods of estate planning and transfer of assets. The complexity and flexibility of such trusts allows for potential tax savings, asset management and increased control over the estate upon death.