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How does a testamentary trust work?

Putting aside money and property into a trust may seem like a good idea, but you might worry you could change your mind about placing assets into a trust later on. By then, it may be too late to retrieve them. As an alternative, you could consider a testamentary trust.

As opposed to a trust you create here and now, a testamentary trust is one you set up with a last will and testament.

The creation of a testamentary trust

A testamentary trust only goes into effect after you die. As the trust creator, you designate a trustee to manage the assets. The trustee follows your instructions in the will for how and when to distribute the trust assets to beneficiaries.

For example, you may want to set aside money for your minor children but not give them full control until they turn 18 or finish college. You would name a family member or trusted friend as trustee and instruct them to only distribute money to the children for education until a certain age. After the trustee meets your conditions, the assets go to beneficiaries and the testamentary trust terminates.

Benefits of a testamentary trust

A major advantage of this kind of trust is that it gives you control over asset distribution. You decide when and how beneficiaries receive their inheritance. This prevents beneficiaries from squandering assets if they are too immature to handle coming into an inheritance. Also, by putting off the creation of the trust until after your death, you can alter your plans for the trust as you see fit.

In addition, you may arrange that proceeds from your life insurance policy pay directly into the trust. According to 2023 data from LIMRA, 52% of Americans have life insurance, so this can be an especially useful estate tool for many people.

Possible drawbacks of a testamentary trust

A disadvantage of the trust going into effect after you die is that it makes it harder for the trustee to clarify your wishes if any provisions are unclear. Also, the trust is subject to the probate process since it is part of your will, unlike a living trust that avoids probate. Furthermore, running a trust involves court fees you must also consider, especially if the trust lasts for a long time.

A testamentary trust is not for everyone. Still, it offers possible advantages worth exploring if you want to maintain as much control over your property as possible.

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