A question many parents and grandparents ask is, “How do I make sure my children or grandchildren are taking care of in the event I die before they reach 18 years of age?” Maybe not exactly that question, but I hear some form of that question from clients with children. One answer I tend to give these clients is to create a testamentary trust.
A testamentary trust is a trust created in a person's last will. The trust will detail the terms of the trust. A testamentary trust becomes effective upon the death of the settlor. A settlor is the individual who makes the trust. The settlor is able to modify the trust up until their death. Unlike other trusts, a testamentary trust is subject to probate because the assets that will belong to the trust are still owned personally by the settlor at the time of death.
The settlor is able to allocate and specify exactly what assets will belong to the trust at the time of their death. The purpose of the testamentary trust is so the settlor can indicate at a certain point in time in which the beneficiary of the trust may receive the asset. This is relevant to parents because they can state that their children will not receive the assets until they reach the age of 18 or later. Once the beneficiary receives the assets, the trust is terminated.
There are three (3) parties to this transaction. The first being the settlor or can be called the grantor. The settlor/grantor creates the trust and indicates what assets are going into the trust and sets the terms for the trust. The second is the beneficiary or beneficiaries. The beneficiary is the party who will receive the assets from the trusts. Finally, the third party is the trustee or trustees. The trustee is the party who will handle and manage the assets of the trust until the beneficiary receives the assets.
Example of what a testamentary trust looks like is as follows: A settlor may have a 11-month-old daughter to whom the settlor wishes to leave a certain number of assets to at the age of 21. The settlor will appoint a trustee, generally someone trustworthy and close to the settlor, who will be managing the assets for the beneficiary until they reach the age of 21. Once the settlor's daughter reaches the age of 21, she will receive the assets. The trust then terminates.
Some advantages of a testamentary trust are that it can give the settlor control over how their assets are disbursed at the time of their death, a testamentary trust can be funded by life insurance policies, and there can be multiple testamentary trusts within a will. A disadvantage of a testamentary trust is that it will go through probate. Since the trust will go through probate, the trustee also may attend court regularly to update the court on how the trust is being managed. Another negative point is that a testamentary trust is public knowledge. A will becomes public knowledge when submitted for probate and the will contains the testamentary trust, meaning it is not private. A final point worth considering that can be a negative of a testamentary trust is that a trustee may wrongly interpret the testamentary trust and not follow the settlor's intended wishes. This can be easily avoided if the will and the trust are drafted by a licensed Pennsylvania attorney. If this is a concern, a revocable trust may also be a more suitable option. An attorney will advise an individual on their best strategy.
Testamentary trusts are excellent planning tools for parents and grandparents with children. Testamentary trusts can be used for a wide array of things not just for parents and grandparents. McKelvey Law Offices, LLC practices estate planning and can help draft your trust and plan for the future.
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