Paul O. Dillon, Attorney at Law

Are Testamentary Trusts a Good Idea?

Not everyone wants to leave everything to their heirs without restrictions. Some want to protect money inherited from their own parents for their children or want to keep an irresponsible child from squandering an inheritance. For people who want more control over their assets, a testamentary trust might be useful, according to the recent article “What Is a Testamentary Trust and How Do I Create One? from U.S. News & World Report. A testamentary trust can also be used to leave assets to minor children, who may not legally inherit wealth directly.

However, your estate planning attorney may have some other, better tools for you.

A testamentary trust is a trust created to hold assets created in a last will and testament. It does not become active until after a person dies and the will has been validated by probate court. Once this has happened, the trust is activated and the decedent’s assets are placed into the trust. At this point, the trustee is in charge of the trust’s management and asset distribution.

A testamentary trust is different from a living trust. The living trust, also known as a revocable trust, is created while the grantor (the person making the trust) is still living. When the person dies, the trust doesn’t go through probate and assets are distributed according to the directions in the trust.

Both testamentary and living or revocable trusts are used in estate planning. However, the living trust may have far more flexibility and be easier to manage for a very simple reason: testamentary trusts are part of the probate process, administered through probate for as long as they are in effect.

There are advantages and disadvantages to both kinds of trusts. The testamentary trust is often used to manage assets for minor children. It’s also a good tool if you’re worried about an adult child getting divorced and keeping the family money in the family. The long-term court oversight is more protective, which may be desirable, but it can also be more expensive.

The best reason for a testamentary estate? When someone involved in the person’s estate loves to get tangled up in litigation. Having to deal with probate court in addition to civil court might make a litigious family member a little less likely to bring a lawsuit.

Your will must contain specific directions for what assets go into the testamentary trust. Assets with beneficiary designations, such as life insurance policies and retirement accounts, don’t go into any trusts, unless a trust is designated as the beneficiary of the policy or account. They are instead distributed directly to beneficiaries outside of the probate estate.

Changing or annulling a testamentary trust is relatively easy while you are living—simply update your will to reflect your new wishes.  However, once you have passed, the testamentary trust becomes irrevocable and may not be changed.

Which is best for your situation? Your estate planning attorney will evaluate these and other estate planning tools to find the best solutions to protect you and your family.

Reference: U.S. News & World Report (July 14, 2022) “What Is a Testamentary Trust and How Do I Create One?

Can You Remove Someone from a Life Estate?

Parents often use life estates to leave the family home to children, while remaining in the house for the rest of their lives. However, sometimes things don’t work out as intended. If and how changes may be made to a life estate is the focus of a recent article “How to Remove Someone from a Life Estate” from Yahoo! Finance. For the life estate to be flexible, certain provisions must be in the document when it is first created. An experienced estate planning attorney is needed to do this right.

A life estate allows two or more people to jointly own real estate property. One person, referred to as the “life tenant” has ownership of the property for as long as they live. The other person, called the “remainderman,” takes possession only after the life tenant’s death. Multiple people can be named as life tenant and remainderman. However, the more people involved, the more complicated this arrangement becomes.

The remainderman has an unusual position. They don’t have full possession of the property until the life tenant dies, yet they have an interest in the property. The life tenant is not allowed to do certain things, like take out a mortgage or sell the property, without the consent of the remainderman.

The remainderman must agree to any changes in any person or persons named as other remainderman. If there’s more than one, which happens when there’s more than one adult child, for instance, all of the remaindermen must agree, before any names on the life estate can be removed or changed.

If one of the remainderman becomes heavily indebted, has a contentious divorce, or is sued for a considerable sum, their share of the property could be lost to creditors, ex-spouses, or adversaries. In that case, removing the problematic remainderman could protect the value of the home.

Most life estates are irrevocable, and the laws concerning life estates vary by state.

One way to work around the need for remainderman approval, is to use a Testamentary Power of Appointment, a clause in a will permitting the life tenant to change the person to whom the property will be left upon death. Invoking the Power of Appointment doesn’t make the life estate invalid, so the tenant is still constrained from selling the property or taking any other actions without permission from the remaindermen.

The testamentary power of appointment does give the life tenant some negotiating muscle but must be built into the documents from the start.

Another trust used in this situation is the Nominee Realty Trust. This is a revocable trust holding legal title to real estate. A property owner files a new deed transferring ownership to the nominee realty trust. The trust specifies who receives the property after the owner’s death. The grantor of the nominee trust can direct the actions of the trustee, so the life tenant has the legal ability to tell the trustee to change the names of the remaindermen. This flexibility may be desirable when the children are problematic. This has to be set up when the life estate is first established.

There are occasions when the remainderman wants to terminate the interest of the life tenant. This is actually easier than removing or changing the remainderman but requires the life tenant to do something particularly egregious or illegal. The life tenant has certain rights: to rent out the property, to change or improve the property—as long as the property is being improved. The life tenant is responsible for paying taxes, maintaining the property and avoiding any liens being placed on the property.

If the life tenant does not fulfill their responsibilities or allows the property to lose value, it may be possible for the remainderman to have the life tenant’s interest terminated. However, that depends upon the provisions in the life estate. This option should be discussed and planned for when the life estate is created.

Reference: Yahoo! Finance (Dec. 16, 2021) “How to Remove Someone from a Life Estate”

How Do I Address an Estranged Child in My Estate Planning?

For most families, estate planning is a relatively straightforward task, protecting loved ones and preparing to distribute assets. But when parent-child relationships have frayed or fractured, estate planning becomes more complicated and emotional, according to the article from The News-Enterprise titled “Estate planning must account for estranged children.”

The relationship may be broken for any number of reasons. The child may have married an untrustworthy person, have addiction issues, or have made a series of hurtful decisions. In some families, the parents don’t even know why a break has occurred, only that they are shut out of lives of their children and grandchildren.

The reason for the estrangement impacts how the parents address their estate plan regarding the child. If there is an addiction problem, the parents may want to limit the child’s access to funds, and that can be accomplished with a trust and a trustee. However, if the situation is really bad, the parents may wish to completely disinherit the child. Both require considerable legal experience, especially if the child might contest the will.

There are three basic options for dealing with this situation.

One is to leave an outright gift of some kind, with no restrictions. The estranged child may receive a smaller inheritance, but not so small as to open the door to litigation.

Second, the parent may create a testamentary trust in their last wills. Testamentary trusts become effective at death, with funds going into the trust and controlled by a trustee. The heir will have no control over the assets, which are also protected from creditors, divorces, or scammers.

Third is the option to completely disinherit the child. That way the child will not be entitled to any portion of the estate. The language in the last will must be watertight and follow the laws of the state exactly so there is no room for the disinheritance to be challenged.

There needs to be language that clarifies whether the child’s descendants (grandchildren) are also being disinherited. If the child is disinherited but their children are not, the descendants will inherit the child’s share as if the child had predeceased his or her parents.

Some estate planning attorneys recommend writing a letter to the child to explain the reasoning behind their disinheritance. The letter could be seen as reinforcing the parent’s intent, but it may also open old wounds and have unexpected consequences.

Your estate planning attorney will be able to clarify the steps to be taken in your estate. This is a situation where it will be helpful to discuss the full details of the relationship so the correct plan can be put into place.

Reference: The News-Enterprise (July 20, 2021) “Estate planning must account for estranged children”

What are the Advantages of a Testamentary Trust?

One reason to have a last will and testament is to protect minor children. A will offers a means of providing for a minor child through a testamentary trust, which is also a good tool for leaving an inheritance to someone who might not use their bequest wisely, says the recent article “What is a Testamentary Trust and How Do I Create One?” from wtop news.

Trusts are legal entities that hold assets, and money or other assets in the trust are managed according to the wishes of the person who created the trust, known as the grantor. A testamentary trust is created through the person’s will and becomes effective upon their death. Once the person dies, their assets are placed in the trust and are distributed according to the directions in the trust.

A trust can also be created while a person is living, called a revocable trust or a living trust. Assets moved into the trust are distributed directly to heirs upon the person’s death and do not go through the probate process. However, they are administered without probate, as long as they are in effect. Living trusts are also managed outside of the court system, while testamentary trusts are administered through probate as long as they are in effect.

A testamentary trust is used to manage money for children. However, it can also protect assets in other situations. If you are concerned about an adult child getting divorced and don’t want their inheritance to be lost to a divorce, a trust is one way to keep their inheritance from being considered a marital asset.

The oversight by the court could be useful in some situations, but in others it becomes costly. Here’s an example. Let’s say a testamentary trust is created for an 8-year-old to hold assets until she turns 25. For seventeen years, any distribution of assets will have to take place through the court. Therefore, while it was less costly to set up than a living trust, the costs of court proceedings over the seventeen years could add up quickly and easily exceed the cost of setting up the living trust in the first place.

If someone involved in the estate is litigious and likely to contest a will or a trust, having the court involved on a regular basis may be an advantage.

Having an estate planning attorney create the trust protects the grantor and the beneficiary in several ways Trusts are governed by state law, and each state has different requirements. Trying to set up a trust with a generic document downloaded from the web could create an invalid trust. In that case, the trust may not be valid, and your wishes won’t be followed.

Once a testamentary trust is created, nothing happens until you die. At that point, the trust will be created, and assets moved into it, as stipulated in your last will and testament.

The trust can be changed or annulled while you are living. To do this, simply revise your will with your estate planning attorney. However, after you have passed, it’ll be extremely difficult for your executor to make changes and it will require court intervention.

Reference: wtop news (July 19, 2021) “What is a Testamentary Trust and How Do I Create One?”

How Does a Trust Work for a Farm Family?

There are four elements to a trust, as described in this recent article “Trust as an Estate Planning Tool,” from Ag Decision Maker: trustee, trust property, trust document and beneficiaries. The trust is created by the trust document, also known as a trust agreement. The person who creates the trust is called the trustmaker, grantor, settlor, or trustor. The document contains instructions for management of the trust assets, including distribution of assets and what should happen to the trust, if the trustmaker dies or becomes incapacitated.

Beneficiaries of the trust are also named in the trust document, and may include the trustmaker, spouse, relatives, friends and charitable organizations.

The individual who creates the trust is responsible for funding the trust. This is done by changing the title of ownership for each asset that is placed in the trust from an individual’s name to that of the trust. Failing to fund the trust is an all too frequent mistake made by trustmakers.

The assets of the trust are managed by the trustee, named in the trust document. The trustee is a fiduciary, meaning they must place the interest of the trust above their own personal interest. Any management of trust assets, including collecting income, conducting accounting or tax reporting, investments, etc., must be done in accordance with the instructions in the trust.

The process of estate planning includes an evaluation of whether a trust is useful, given each family’s unique circumstances. For farm families, gifting an asset like farmland while retaining lifetime use can be done through a retained life estate, but a trust can be used as well. If the family is planning for future generations, wishing to transfer farm income to children and the farmland to grandchildren, for example, a granted life estate or a trust document will work.

Other situations where a trust is needed include families where there is a spendthrift heir, concerns about litigious in-laws or a second marriage with children from prior marriages.

Two main types of trust are living or inter-vivos trusts and testamentary trusts. The living trust is established and funded by a living person, while the testamentary trust is created in a will and is funded upon the death of the willmaker.

There are two main types of living trusts: revocable and irrevocable. The revocable trust transfers assets into a trust, but the grantor maintains control over the assets. Keeping control means giving up any tax benefits, as the assets are included as part of the estate at the time of death. When the trust is irrevocable, it cannot be altered, amended, or terminated by the trustmaker. The assets are not counted for estate tax purposes in most cases.

When farm families include multiple generations and significant assets, it’s important to work with an experienced estate planning attorney to ensure that the farm’s property and assets are protected and successfully passed from generation to generation.

Reference: Ag Decision Maker (Dec. 2020) “Trust as an Estate Planning Tool”

How Does a Spendthrift Trust Protect Heirs from Themselves?

This is not an unusual question for most estate planning lawyers—and in most cases, the children aren’t bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best answer is the use of a trust. By leaving money to an heir in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust, because they think that a trust is only for wealthy people or that creating a trust must be very expensive. Not necessarily. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust, in accordance with the laws of your state.

In this scenario, the trust is created in the will, known as a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the appropriate article in the will and can be created to suit your wishes. For instance, you can decide to distribute the money over a three or a thirty-year period. Funds could be distributed monthly, to create an income stream. They could also be distributed only when certain benchmarks are reached, such after a full year of employment has occurred. This is known as an incentive trust.

The opposite can be true: distributions can be withheld, if the heir is engaged in behavior you want to discourage, like gambling or using drugs.

If the funding for the trust will come from proceeds from a life insurance policy, it may be necessary to have your estate planning attorney contact the insurance company to be sure that the insurance company will permit a testamentary trust to be the beneficiary of the life insurance and avoid probate altogether.

Not all insurance companies will permit this. There may be some other changes that need to occur for this to work and be in compliance with your state’s laws. However, your estate planning attorney will be able to resolve the issue for you.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”

What Is a Testamentary Trust and Do You Need One?

A couple doing some retirement planning has an updated will and a medical power of attorney in place, prepared with the help of an estate planning attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.

Do they need or want a trust to be part of their estate plan? That’s question from a recent article titled “It’s the law: Testamentary trusts provide protection for assets” from the Post Register.

First, there are many different types of trusts. A living trust, also known as a revocable trust, irrevocable trusts and testamentary trusts are just three types. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit assets?

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families, where there may be children from other marriages.

Trusts are also valuable to distribute assets, if there are beneficiaries with an inability to manage money, undue spousal interference or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property, if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

Should I Use a Trust to Protect My Children’s Inheritance?

Parents with savings have several options for their children’s future inheritances.

nj.com’s recent article answers this question: “We have $1.5 million. Should we get a trust for our children’s inheritance?” According to the article, parents could create lifetime trusts or trusts in their wills for the benefit of the surviving spouse during the spouse’s lifetime.

After that, they can have the remainder of the assets pass in trusts for each of the children, until they reach a certain age or ages.

A lifetime trust is a type of trust that’s created during an individual's lifetime. This is different from a testamentary trust, which is a trust created after a person's lifetime through the operation of that person's will.

Usually the individual who settles the trust (the "Grantor") will retain control over the assets in the trust, including the right to revoke the assets during his or her lifetime. These forms of lifetime trusts are known as grantor trusts.

Another option is to have these types of trusts continue for the benefit of the grandchildren.

The children’s trusts can have instructions that the assets and income are to be used for the health, maintenance, education and support of the child.

The parents would need to name a trustee or co-trustee. This is the person who’s responsible for investing the assets, filing tax returns and paying taxes (if necessary). He or she will also distribute the assets, according to the terms of the trust.

Trusts are complicated business, so meet with an experienced estate planning attorney to determine the best strategies based on your circumstances and goals.

Reference: nj.com (October 16, 2019) “We have $1.5 million. Should we get a trust for our children’s inheritance?”

How Do I Know When My Kids Should Get Their Inheritance?

A common question in estate planning is determining the appropriate time for children to have access to their inheritance.

Wealth Advisor’s article asks, “When Should Children Have Access To Their Inheritances?” The article looks primarily at distributions from trusts created by a will (testamentary trusts). However, these considerations also apply to trusts created during your lifetime, which are called inter-vivos trusts.

One big difference between your will and lifetime irrevocable trusts, is that during your lifetime, your will can be updated and changed.  However, amending or changing, a lifetime irrevocable trust is much more difficult. Usually it requires a statutory solution (decanting) or permission from the courts.

Distributions can be discretionary, mandatory or event-driven. A common distribution structure includes mandatory distributions at specified ages, such as at 25, 30, and 35. A third of the principle is distributed at age 25, with half of the balance doled out at age 30, and the remaining balance distributed at age 35.

In addition to mandatory distributions, a trust can provide that the trustee has the authority to make either fully discretionary distributions or distributions under some “ascertainable standard,” such as for the beneficiary’s health, education, maintenance, and support.  However, detailing only mandatory distributions or event-based distributions significantly reduces the fiduciary’s flexibility.

A trust should be created with the help of an experienced estate planning attorney. He or she will help guide your decisions about trust distributions, that include both the principal and the income generated by that principal.

In many situations, when an estate plan is designed, you may not be sure of the ultimate size of your children’s inheritance. In that case, your attorney can help you plan for an income stream in today’s dollars, as well as a cost of living adjustment to account for inflation. This will eliminate any mandatory income distributions that may mean large distributions to children at relatively young ages.

Another way to go is to leave the income distributions to the discretion of the trustee. With more flexibility for the fiduciary, distributions can be made based on what your heirs need at that time.

Reference: Wealth Advisor (July 30, 2018) “When Should Children Have Access To Their Inheritances?”