Estate planning in Huntsville, Alabama, can get just as confusing as anywhere else when terms like “wills” and “trust” get thrown around.
A trust usually works in tandem with a last will and testament to ensure that your final wishes are documented and carried out correctly.
Trusts are still essential documents when it comes to ensuring that your loved ones are taken care of. This article will give you a breakdown of one common type of trust, the testamentary trust.
What Exactly Is a Testamentary Trust?
A testamentary trust is a trust created from the terms of your last will and testament.
When you write out your last will, it usually involves specifying the distribution of your assets and possessions and your property. When you include a trust within your will, you’re essentially establishing a protected account, so to speak, in which certain assets will be transferred when the time comes.
A testamentary trust only goes into effect once you’ve passed. Until then, you can change it by updating your will. After your death, it becomes irrevocable.
When you break down a testamentary trust, three specific parties are outlined:
The testator, which is you, the person whose will creates the trust
The trustee, which is the individual appointed to manage the assets in the testamentary trust
The beneficiary, who is the person—or persons—designated to receive the assets within the trust
These trusts are most commonly used among individuals with young children to ensure that they are taken care of properly and keep certain assets in the family. Testamentary trusts can hold an inheritance for minors or vulnerable beneficiaries, control when they receive it, and, with some exceptions, protect it from their own creditors. Don’t expect income tax breaks, though: income a trust keeps reaches the top federal income tax bracket far sooner than an individual’s income does.
Each trust can also be customized per beneficiary if you wish.
How Does it Work?
The way testamentary trusts work is actually straightforward to understand. By design, they’re created to give you control over how your assets are distributed among your beneficiaries when it’s time.
It’s important to understand that a testamentary trust is not the same as a living trust. Therefore, it has no effect while you’re still alive.
Testamentary trusts can be set up to pass on the beneficiary’s inheritance in a graduated manner. For example, they may receive their inheritance or certain assets once they’ve reached certain milestones, such as graduating high school or college, getting married, and so on.
A testamentary trust does not avoid probate.
Because a testamentary trust is created by your will, the will must first be admitted to probate and the estate administered before the trust is funded, which takes time. In Alabama, a full estate administration cannot close sooner than six months after the court appoints the personal representative, because creditors have that long to file claims. Many estates take longer, depending on the assets, debts, taxes, and whether anyone disputes the will.
Lastly, once the trust goes into effect, the appointed trustee will manage the assets until the trust is fulfilled. The expiration date for the trustee’s responsibility is usually aligned with a specific event, such as the beneficiary turning a certain age or hitting a milestone, as mentioned above.
A person named as trustee can decline before accepting. After accepting, a trustee may resign by following the required notice process or obtaining court approval. A willing successor named in the will can take over. If no named trustee can serve, the trust's terms and Alabama law determine how a successor is chosen. Courts do not routinely supervise a trust.
Types of Testamentary Trusts
When you’re thinking about the benefits that come with creating a testamentary trust, one choice to make if you have more than one child is between separate trusts for each child and a single family, or “pot,” trust.
Separate Testamentary Trusts
Separate testamentary trusts are simply separate trusts for each beneficiary you’d like to name.
For example, suppose you have three children. You’d like to distribute your assets among them equally or accordingly in another way. In that case, you could create three separate trusts outlining the specifics for each child.
When the time comes, the trusts would be managed and distributed individually depending on the dates or milestones you’ve assigned to each inheritance.
Family Testamentary Trusts
Family testamentary trusts are sometimes referred to as “pot” trusts, meaning that what you leave your children is managed together in one trust instead of in separate shares. Family trusts allow the assets to be distributed based on each child’s needs and are often used when parents either want or need to leave more funds to one child than the other.
For example, if one child has special needs, they may require additional financial support throughout their lives. A family trust lets the trustee spend more on that child’s needs. But if a child receives or may need SSI or Medicaid, that child’s share usually belongs in a supplemental needs trust written to preserve those benefits.
Testamentary vs. Living Trusts
When you’re estate planning in Huntsville, Alabama, you must understand the differences between the various trusts available. This is to ensure you make the right financial decisions for your loved ones and your assets.
For example, let’s say you wanted to keep your assets private. If this is the case, you may want to opt for a living trust as the assets within a living trust don’t go through probate, so they are generally more private.
Living trusts also take effect while the grantor is alive, so after the grantor’s death the trustee can distribute trust property under the trust’s terms without waiting for probate.
They can also be set up to be revocable by the grantor, in addition to irrevocable trusts. These trusts come in handy if you wish to make modifications. As previously mentioned, a testamentary trust only goes into effect once you’ve passed away, making it irrevocable after that.
How Can I Set Up a Testamentary Trust?
Once you’ve decided on the type of trust that’s right for you, your loved ones, and your assets, your will needs to spell out how you want everything to be managed and distributed. You’ll also need to declare your appointed trustee, which should be someone you trust.
If you have young children or a child who will need help managing money, the terms of the trust and the choice of trustee matter. Contact us today to schedule a consultation with Sarah S. Shepard, who can help you decide what the trust should say and who should run it.
Sarah S. Shepard is an estate planning attorney at Sparkman, Shepard & Shepard, LLC in Huntsville, admitted to the Alabama State Bar in 2012. She prepares wills and trust-based estate plans for families in Huntsville and North Alabama. More about Sarah S. Shepard.