A Complete Guide To Testamentary Trusts

A trust can be a great way to have more control over the manner in which assets are passed to family members and other beneficiaries. Trusts offer an array of advantages, from protecting assets from creditors to providing more privacy for the administration of trust assets. Although there are many types of trusts, each one has a specific goal. A testamentary trust is created only after the trust’s creator (called the trustor) dies. The trustor uses the provisions of their Last Will and Testament to create the trust. This estate planning tool allows the decedent significantly greater control over their assets, even after they have passed way, than would ordinarily be the case. Call (866) 720-0195 to discuss your individual estate planning goals with an experienced and meticulous estate planning attorney with Von Rock Law and learn more.

What Is a Testamentary Trust?

A testamentary trust is created through a will. This means that the will must be probated for the trust to be created. While many other trusts are created for the purpose of avoiding probate, a testamentary trust actually relies on the probate process as part of its setup. The necessity of subjecting the will to probate means that a testamentary trust may not be a good avenue for avoiding estate taxes, if that is a concern for your family. On the other hand, a will cannot assign a trustee or make long-term plans for funds or other assets, so a testamentary trust can be a good way to accomplish very specific long-term goals for assets.

A testamentary trust is a type of irrevocable trust. Unlike most other forms of trusts, however, a testamentary trust does not go into effect until after the trustor passes away. That means there is no option to change it or cancel it once it goes into effect. In some cases, the trustor of other types of irrevocable trusts will nominate themselves as the trustee while they are living; that type of setup is not available in a testamentary trust.

Why Would You Use A Testamentary Trust?

A testamentary trust simply allows greater control over assets after someone passes away compared to a will. The trustor can set up specific rules and restrictions for how funds are to be used as part of their trust document. Then, a trustee is appointed to oversee the distribution and management of those funds over time. The individuals who receive the benefits from the trust are called “beneficiaries.” The Superior Court of California, County of San Francisco provides some helpful basic information about terms used in trust documents that you may wish to review.

Benefits of Trust Administration

The main benefit of a testamentary trust is that a trustee manages the assets in the trust for the life of the trust. That can mean that a trustee manages and distributes funds for years to come. This type of setup will work well for:

  • Managing very specific assets, such as real property or family heirlooms
  • Managing funds on behalf of minors or individuals with special needs
  • Managing funds for a beneficiary who might otherwise be inclined to lose the assets to debt, impulsivity, or addiction
  • Creating long-term income streams for family members or other loved ones
  • Long-term philanthropic giving

Gifting Mental and Emotional Labor

There are many unique situations where having a testamentary trust can be a good idea for individuals who wish to leave to their beneficiaries not only their estate assets, but the gift of shouldering in advance the mental load of managing those assets. You may be able to learn more about trust options by contacting a California estate planning attorney from Von Rock Law.

Testamentary Trusts and Tax Laws

Testamentary trusts offer a unique tax advantage that other trusts often do not have. They have a “step up in basis” that is not available to those who receive money from a living trust. The term “basis” is a tax term that indicates the value of an item at the time that it was acquired. In most cases, the value was the cost of the item at purchase. When items are gifted or left as a bequest when an estate goes through probate, the value is simply the fair market value at the time of the transfer rather than the $0 that it costs to acquire the item.

Income Tax and Basis: A Quick Example

Normally, when someone sells an asset, they must pay income taxes on the difference between the basis of the item and the price for which they sold it. Someone who bought a couch for $500 might be able to sell that same piece of furniture for $750. They would be taxed only on the income they received, which was $250, rather than on the full $750.

Step Up in Basis in Estates

When individuals pass away, they sometimes leave assets that they have held for many years. The basis might be much lower than what the fair market value is when they pass away. A step up in basis is critical in these cases for income tax purposes. When someone receives an asset as part of a will, the basis of the item changes. That basis is no longer the price that the decedent paid to acquire the item on the date of initial purchase, but the value of the item as of the date of that individual’s death. This step up in basis ensures that beneficiaries do not have to pay income taxes on the original purchase price of bequests that have depreciated over the years since they were first acquired.

Step Up in Basis: The Advantage of Probate

A testamentary trust allows any asset contained in the trust to share in the advantage of this step up in basis because the asset passes through the will first. If an asset were to be moved from a living trust to a beneficiary, the beneficiary would not receive this same advantage. As a result, a testamentary trust can be a very good way to pass valuable physical goods or securities to loved ones without making them liable for hefty tax obligations.

The Process To Establish a Testamentary Trust

A testamentary trust is included as part of a will. If someone creates their will, and it includes a testamentary trust, either the will sets out all of the terms and conditions of the trust directly or it refers to another document that includes the terms of the trust. In either scenario, the document will describe:

  • The identity of the trustee
  • Which assets should be transferred into the trust
  • How the trustee will manage the trust
  • The conditions the trustee must use to distribute assets
  • Any other terms and restrictions for the trustee

Because a testamentary trust is irrevocable, it is critical to ensure that the terms and conditions are exactly tailored to the grantor’s preferences. The terms cannot be changed after the trust is established. According to California Probate Code, the continuing jurisdiction of the Superior Courts will only apply to a testamentary trust under certain carefully delimited circumstances, making it even more important that the trust terms are as intended.

Get Help With Testamentary Trusts in California

Is a testamentary trust the right option for you and your family? The experienced estate planning attorneys at Von Rock Law are here to help you develop the carefully tailored estate plan that will honor your values, care for your beneficiaries, and address your unique concerns. Call our office today at (866) 720-0195 to set up your individualized consultation.

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