What are the advantages of a testamentary trust? Can I transfer assets to a testamentary trust? Do trusts have disadvantages? Does a testamentary trust take effect?
The disadvantages of a testamentary trust are few and far between, but there are a few cons that you should consider before creating a testamentary trust.
Costs related to maintenance: Although you will not pay the majority of the costs up front, there are costs that you will need to consider for the sake of the beneficiaries and the trustee. One disadvantage is the cost of administering a testamentary trust. If a professional is appointed trustee, there will be fees for this service. Those are some pretty attractive advantages, but it’s wise to explore the disadvantages of testamentary trusts as well. Taxes on the Family Home.
There may be tax implications for the exemption from capital gains tax on your residence if it’s held in the testamentary trust. An ordinary family trust will accrue penalty taxes each time a beneficiary receives trust money in excess of $1annually. Cons: Cost of Maintenance.
One advantage of a testamentary trust is that it allows the creator to dictate how their money is disbursed at their death. A common reason to create a testamentary trust is to provide for your children after your death. Unlike a living trust, a testamentary trust comes into existence only after the settlor dies. For example, if you still have young kids, you could design how your assets are paid.
Because a testamentary trust doesn’t take effect until after the settlor dies, he or she can make changes up until that point, when the trust becomes irrevocable. The trust will have to shoulder significant amounts of legal fees for its maintenance. This is especially true for trusts that involve special financial investment instruments, or those that have been around for many years.
Con: Not Getting the Trustee You Want In testamentary trusts, the named or appointed trustees can say no to their appointment. As with all types of wills, there are a number of disadvantages that come with setting up a trust. The appointed trustee will be required to meet regularly with probate court to oversee the assets and prove that the trust is being properly handled (investe managed). It typically requires more time and expense to establish a trust than it does to create a Will.
In addition, because a trust must be administered by a Trustee for the life of the trust , the ongoing costs of a trust are something that must be taken into consideration. Assets held by the trustee of a testamentary trust may be insulated from potential third-party claims made against individual beneficiaries. If a beneficiary is experiencing solvency issues, it is possible that the inherited assets may be susceptible to claims made by creditors.
Disadvantages of a testamentary trust The trustee is required to meet with the probate court regularly (at least annually in many jurisdictions) and prove that the trust is being handled in a responsible manner and in strict accordance with provisions of the will which created the trust. Losses cannot be distributed.
The trust structure cannot distribute capital or revenue losses to its beneficiaries. Hence, when a trust incurs a loss, beneficiaries are not able to offset that loss against any other assessable income such as salary, interest, dividends etc. Even though the trust is developed by your will, the trust causes additional paperwork, responsibility and expense for your executor and estate.
Lack of flexibility — there needs to be provision made for dispute resolution and asset devolution strategies in the. There are also tax advantages available through testamentary trusts , making them an effective estate planning tool. There are two commonly utilised types of testamentary trusts : Discretionary testamentary trusts.
A testamentary trust requires that the testator’s will go through the probate process. Potential lack of privacy. Most trusts are created to be and remain private documents. However, the testamentary trust is drafted as provisions in your last will and testament. Probate is necessary to move that property into the name of the trust, just as it would be to transfer it into the names of living beneficiaries.
The pour-over-to-a- testamentary – trust will has disadvantages. It appears more complicated than necessary, inserting a middle man between the executor and the true beneficiaries. One downside of this approach is that the assets used to fund the trust are almost certainly going to go through the probate process.
A trustee is appointed under the will to hold those assets in accordance with the terms of the trust. A QDT is eligible for the same graduated rates of tax as GREs. Testamentary Trusts What is a testamentary trust ?