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Testamentary Trust:What is a Testamentary Trust?

What is a Testamentary Trust?

What is a testamentary trust? A testamentary trust extends the will that permits the grantor (deceased person) to place assets into a trust (irrevocable or revocable trust) after the grantor has passed away. The purpose of the testamentary trust is to control who receives what assets and when the beneficiaries receive the assets.

A testamentary trust is an extension of a will that allows someone to put assets into a trust after they pass away for the purpose of controlling their distribution after they are no longer around to direct the assets. Testamentary trusts, while useful to set up instructions for the use of your assets after you are gone, aren't useful for much else. A testamentary trust is basically a trust that emerges from your will at the time of your death. For example, one can state in their will at the time of death that they would like all of their assets to be placed in a trust for the benefit of their son. This trust could potentially have various instructions as to what benefits the son could receive, such as education, rent, a car, a trip to Iowa and whatever else the grantor (the deceased person) desires to be written in. Whitney Houston provides a real life example as she created a testamentary trust for the purpose of limiting the availability of assets to her daughter. The instructions were to give a percentage of assets upon her daughter's 25th, 30th, and 35th birthdays.
"A trust is a great way to help your family when you are gone. You can make sure they are fiscally responsible, provide for all of their needs and accommodate only the wants that you choose," explains Rocco Beatrice of Estate Street Partners, parent company of Although this sounds helpful, any trust can accomplish this. One problem is that with this kind of trust, your family will still have to go through probate and pay estate taxes. Setting things up this way also does not help with asset protection or Medicaid planning.
A domestic Trust may or may not apply for a federal identification number. Revocable Trusts need not apply, but an irrevocable Trust generally applies for Federal identification. A federal identification application is filed on Federal From W-4. If it's a Foreign Trust, the Grantor must check the box on Form 1040 schedule B, line 7a for the existence of a foreign bank account, and Form 1040 schedule B line 8 reporting the creation of a foreign Trust on Form 3520.

What is probate?

Probate is the procedure in which the judge peruses your estate planning documents, accounts for all of your assets and then decides on who will receive what assets. The job description of an executor (aka personal representative) is to ensure the judge receives all the necessary papers and that all legal matters are followed. The executor can have an enormous task ahead of him and this process in itself can take several months or even years and costs 4-10% of the estate. A testamentary trust does not avoid this process, but two other kinds of trusts do: an irrevocable trust and a living (revocable) trust.
Unlike the testamentary trust, both the irrevocable and living (revocable) trusts are set up during one's lifetime. This means that they are funded with assets before death and, since the assets were not owned by the deceased at death, are not subject to the probate court process. For those interested in protecting assets and reducing the estate tax, the UltraTrust irrevocable trust is the best choice. "An UltraTrust irrevocable trust is, in my opinion, the best option for those people who want to best secure their assets to provide for their loved ones," explains Rocco Beatrice. For those solely looking to avoid probate and do not need or want the increased protection and reduction in taxes, but are more interested in control, the living (revocable) trust will work as well.
A testamentary trust neither helps with estate taxes nor protects assets. During your lifetime, your assets are in your name and subject to creditors, lawsuits and any other financial threat one can imagine. A testamentary trust doesn't help with estate taxes either. By waiting until after death for assets to enter a trust, one has not taken advantage of the yearly gift allowance or any of the many strategies employed by prudent planners to reduce taxes. These all must be done in your lifetime using an irrevocable trust.
In summation, testamentary trusts only do one thing: allow you to control assets when you are gone, although any trust can accomplish this. "I don't know why testamentary trusts are still around. They offer no advantage and a huge disadvantage to a well-written irrevocable trust like the Ultra Trust", states Rocco Beatrice of Estate Street Partners, "I have never recommended one and I don't expect to recommend one in the future. There are much better options that give much better results."

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