How can Testamentary Trust Protect You and Your Family
There are various types of trusts that can be formed as part of estate planning. A trust is basically an obligation to hold the ownership of property or other assets for the rightful beneficiaries of the Trust. A trust is usually managed by a person known as the Trustee, who is only responsible for managing the assets of the trust for the beneficiaries, but is not the owner of those assets. Therefore, by setting up a trust, it is possible to separate the ownership and control of assets from the benefits received through the assets. While all the assets of a trust are owned by the trust, any income arising from those assets is passed on to the beneficiaries of the trust. A testamentary trust is a type of trust that comes into effect by means of a Will.
Understanding Testamentary Trusts
The term testamentary refers to something that occurs due to the presence of a Will. Hence, a testamentary trust is a kind of trust that has been established as part of a person’s Will. Usually when someone is planning their estate, the first thing that they do is create a will and leave all their assets to their beneficiaries under the will. In such situations, all the assets of that person are transferred to the named beneficiaries upon the death of the testator (the person who created the Will).
However, there is another way in which a person can transfer their assets to their heirs and that is through a testamentary trust. Instead of transferring the ownership of assets directly to the beneficiaries, a clause is created in the will for setting up a testamentary trust upon the death of the testator. Once the trust is created, all the assets are transferred to the trust and the rightful heirs are named as the beneficiaries of the trust. The trust will own the assets till such time as specified in the will and after that the assets will be transferred to the beneficiaries. However, all the income that arises from the trust’s assets will be the sole property of the beneficiaries and does not go to the trustee of the trust.
Therefore, the main purpose that a testamentary trust accomplishes is to transfer ownership of assets to the beneficiaries at a later date rather than immediately upon the death of the person who creates the will. There are several reasons why people may not want to pass on their assets directly to their heirs. Here is a look at some of them:
- Protecting minor children: Let us assume that a couple has created a huge amount of wealth and they have two small children. Now one of their main worries may be the handling of their estate in case they die. If their children are still of minor age when the couple dies, then transferring their estate to the kids at such a young age may not be advisable. Hence, the couple may choose to establish a testamentary trust upon their death and settle all their assets upon the trust. The kids are then named as the beneficiaries of the trust and a provision is made for all the assets to be transferred to the kids when they reach a certain age in adulthood. Till such time that the kids become adults, the trust and its assets will be managed by a trustee and held in the trust for the benefit of the children. In this manner, it is possible for parents of small children to protect their children from the hassles of managing an estate and at the same time ensure that their estate is well looked after for their kids. Similarly, if parents have a mentally unfit child, they can use testamentary trusts to ensure that their assets are being used in the best possible way for the benefit of their child. Since the child is not mentally stable, he does not need to assume ownership of the assets, but will still enjoy all the benefits arising from them.
- To protect family assets from divorce proceedings: It is very likely that a person’s inheritance may become part of divorce proceedings and the person’s spouse can make a rightful claim to assets inherited by them. Therefore, if parents want to ensure that their assets cannot be claimed by their child’s spouse during a divorce, they can create a testamentary trust rather than leaving their estate to their kids. Since the trust is the owner of the assets, they cannot become subject to any kind of claim under divorce proceedings. However, the kids can continue to enjoy the benefits of the assets as they are the beneficiaries of the trust.
Another reason why people create testamentary trusts is because they want the income from their estate to be used for philanthropic causes or for the benefit of charities. Doing so through a trust is a much better option rather than burdening the executor of the will with such wishes.
Therefore, if any person wishes to delay the passing of their assets to their heirs for whatever reason, they can use testamentary trusts for accomplishing the same.