Testamentary Trusts: The Best of Both Worlds

You have several different options when it comes to creating the right estate plan. Some people believe that a revocable living trust is the best way to go, while others think that a last will and testament (commonly known as a will) best suits their circumstances. Others find that a combination of both—through the use of a testamentary trust—provides the right amount of control and protection for themselves and their loved ones.

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A Testamentary Trust Can Provide a Solution

A testamentary trust will own your accounts and property which, during your lifetime, are held solely in your name and which do not have designated beneficiaries. Use of a testamentary trust allows you to instruct how your money and property will be handled upon your passing. Unlike a revocable living trust, a testamentary trust is created upon your death and your accounts and property are transferred to the trust through the probate process.

You Can Protect Your Loved Ones

Depending on your circumstances, your loved ones may want or need the extra protection that a testamentary trust can provide.

●     Surviving spouse. Some couples are hesitant to leave everything to their surviving spouse out of fear that the surviving spouse could be taken advantage of, remarry, or otherwise lose the money and property that was left to them. A testamentary trust can allow a surviving spouse to access the money and property while including extra protections to safeguard it.

●     Minor child. In most states, minor children cannot legally own anything. If money and property are left to a minor, the court may need to appoint someone to manage the inheritance and make sure that it's used appropriately. A testamentary trust allows you to choose who manages the inheritance and provide specific instructions about how the money and property should be used.

●     Special needs individual. If you have a loved one who is currently receiving or may need to avail themselves of certain government benefits due to a disability, a poorly structured inheritance can jeopardize their ability to qualify or keep those government benefits that they need to survive. A properly structured testamentary trust can provide funds to your loved one to supplement what they are receiving from the government without disqualifying them from government assistance.

Your Loved Ones Will Still Have to Go Through Probate

Although you are using a trust to manage and distribute money and property to your loved ones, the probate court still has to be involved. As opposed to a revocable living trust that is created during your lifetime, a testamentary trust comes into existence upon your death during the probate process. The person you name as the executor or personal representative of the testamentary trust will oversee changing the ownership of your accounts and property from you as an individual to the trustee of the testamentary trust. Once ownership of accounts and property has been changed, the trustee will manage the trust according to the instructions in the will for the trust’s duration. When all of the accounts and property have been given to the intended beneficiaries, the trust terminates. During the administration process, the trustee might be required to provide annual reports to the court and other important parties and may have to periodically appear before a judge.

Although the probate process can be time-consuming, expensive, and public, using a testamentary trust may still be the best option in some circumstances. Some people find that it provides stability and harmony by allowing a third party (the probate court) to oversee the process. This can help families who may otherwise argue over the details of the trust administration to remain cordial throughout the process.

Don't Forget Other Important Documents

Even if you choose to include a testamentary trust as part of your will, there are other important estate planning tools you must also have to properly protect yourself and your loved ones. Because a will only covers what happens to your money and property when you pass away, we must also plan for a situation in which you are alive but unable to make your own decisions, which is known as incapacity.

Power of Attorney

A power of attorney, also known as a financial power of attorney, allows you to choose a trusted person (the agent) to handle your personal financial matters upon your incapacitation without court involvement. The extent of your agent’s authority is determined by the type of financial power of attorney that you've prepared; it can be as broad or restricted as you like. Another important consideration when preparing a financial power of attorney is choosing when the agent can act. One option is to enable the agent to act immediately once you have signed the document. A second option is to have a springing financial power of attorney that only becomes effective once it has been determined that you are incapacitated to the point that you can no longer manage your affairs. It's important to note that some states do not allow springing powers of attorney.

Health Care Power of Attorney

A health care power of attorney, also known as a medical power of attorney, allows you to appoint a trusted person as a decision-maker to communicate on your behalf or make healthcare decisions for you upon your incapacitation without court involvement.

Living Will

A living will, also known as an advance directive, allows you to convey your wishes regarding end-of-life decisions, such as how long to continue artificial hydration and nutrition or how long to continue artificial respiration when you are in a persistent vegetative state or have a terminal condition and with no chance of recovery. This document will help the decision-maker under your health care power of attorney make informed choices about your care and respect your wishes for end-of-life care.

HIPAA Authorization

A Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorization form allows you to grant specific individuals access to your confidential and protected information (e.g., to get a status update on your condition or review your test results) without giving those individuals the authority to make decisions on your behalf. Giving this information to your loved ones can help all parties stay on the same page even if only one person is authorized to make medical decisions on your behalf. 

Nomination of Guardian

Some states have a separate document that allows you to nominate a guardian for your minor child.Some people prefer the separate document because they can change guardians with ease and without having to update their entire will or pour-over will. This document can be referenced in your will so that your nomination will be known during the probate process.

Temporary Guardianship

Some states allow for a separate document in which you may name a person to make decisions for your minor child when you are unable to, such as if you are incapacitated or traveling without your child and need to give someone authority to make decisions for them in your absence. It is important to note that this document is only effective for a short period (typically six months to a year), and a temporary guardian’s actions are restricted; for example, a temporary guardian can't agree to certain actions, such as the child’s adoption or marriage.

Let’s Choose the Right Option for You and Your Loved Ones

There are many different options when it comes to crafting an estate plan that's right for you. Dotzler Law is committed to developing a plan that protects you, your loved ones, and your legacy. If you are interested in learning more about testamentary trusts or reviewing your existing estate plan, give us a call at (877) 544-DLAW.