Planning for the future can feel overwhelming, especially when you’re thinking about how to protect your loved ones after you’re gone. You probably have heard of trusts as a way to protect your assets. But what is a testamentary trust?
A testamentary trust offers a way to ensure your assets are managed responsibly and distributed according to your wishes.
By including a testamentary trust in your will, you create a plan that takes effect after your passing, giving you control and peace of mind about what comes next.
While there are many similarities, there are a few differences between a testamentary trust and a living trust, and it is important to understand these differences before making your decision.
How Does a Testamentary Trust Work in North Carolina?
Understanding the foundational elements of estate planning under North Carolina law can help you determine whether a testamentary trust will suit your specific goals and your lifestyle.
A comprehensive estate plan, regardless of an individual’s level of wealth or personal affairs, should typically protect and plan for the following:
- Healthcare (pre-death and certain matters involving final disposition arrangements);
- Financial (pre-death)
- Financial (post-death)
There are various types of legal documents available to help ensure that these three primary estate planning components are properly planned for.
The main objective is that your estate plan both reflects your wishes and is legally enforceable, preferably in a manner that is efficient and effective for both you and those named in your legal documents.
A testamentary trust is a type of trust that offers a structured way to manage and distribute your assets according to your wishes after your passing.
Here’s what you need to know.
What Is a Testamentary Trust?
A testamentary trust is created through a last will and testament and only takes effect after the person creating the will, known as the testator, passes away.
- A living trust is a document that is physically separate from a last will and testament (of course, with some overlapping components).
- A testamentary trust is actually written within the contents of the last will and testament.
Of course, the primary goal of a last will and testament is to further ensure your estate’s property is given to the person(s) you wish to inherit from your estate.
Many times, the testamentary trust (written within the will) only becomes “activated” if a certain person or group of persons or entities becomes the beneficiary due to the death of another named in a Will.
- Example: Sally’s Last Will and Testament names her adult son, John, as her primary and sole beneficiary, to inherit from her outright, and in the event he dies before her, she names John’s minor children as her contingent beneficiaries, with such inheritance being subject to the terms of her testamentary trust.
Analysis: If John outlives Sally in this example, the testamentary trust she has created will not be activated – the terms have no effect on John’s inheritance and are otherwise not a factor in the administration of her estate.
If John dies before Sally, the testamentary trust is activated and the terms of the trust will dictate how and when John’s minor children will benefit from her estate. Unlike a living trust, which is typically funded during one’s lifetime, it is unlikely that Sally will experience any substantial effect from the testamentary trust prior to death. The effect is typically seen post-death.
A testamentary trust can be especially useful if you desire the control that a trust has to offer, but wish for that type of control to only apply under certain circumstances, such those pertaining to a beneficiary’s age, competency level or even financial intellect. It is designed to hold and manage the deceased’s assets for the benefit of specific individuals or causes, as outlined in the trust instructions.
Unlike a revocable living trust, a testamentary trust does not avoid probate, at least not in the same way that is possible with a living trust.
A primary advantage with a living trust is that it is designed in a manner to avoid or substantially minimize what is commonly referred to as the probate process or estate administration, which is the formal process of administering an estate’s assets through the North Carolina court system.
A testamentary trust written within a will cannot avoid this process altogether, mainly because a will must be probated within the NC court system in order to be viewed as enforceable; however, a well-crafted testamentary trust can decrease the level of the court’s involvement with the trust’s assets.
Regardless of the type of trust you have chosen, it is absolutely essential that your document is written in such a way that leaves no room for interpretation. A poorly written trust or will instrument can cause more harm than good, and we see this happen far too often in this “do it yourself” era.
Unfortunately, many times this is not discovered until it is too late to rectify. Be wary of legal documents found online, as many do not comply with NC state law or do not contain essential but often overlooked components.
A badly written trust can create additional challenges for your beneficiaries, at the very least. Even worse, an ill-conceived trust or will could unintentionally give property to individuals you did not wish to benefit from your estate.
Key Parties Involved
Every testamentary trust involves three main parties:
- Grantor (testator): The person creating the trust through their will.
- Trustee: The individual or entity managing the trust assets according to the deceased’s instructions.
- Beneficiaries: The individuals or organizations receiving benefits from the trust, such as young children, family members, or charities.
Creating a Testamentary Trust
A testamentary trust is created through specific instructions in the testator’s will. The instructions within the testamentary trust are known as terms, and they are what dictates how the trust will operate, and who will manage and benefit from the trust.
The will and testamentary trust does not necessarily decide on which assets within its control, but it does dictate what happens to the assets that fall under its authority.
Once the testator’s death occurs, the will must formally be submitted for probate and and from that point forward, the trust is established, but again, whether the terms are implemented will depend on how the document is written.
Of course, having the documents in place is very important, but often overlooked is considering which assets are actually controlled by the terms of your Will, and which are controlled by outside sources, such as a revocable or irrevocable trust, or beneficiary designation.
The answer to this question is incredibly fact specific, so below are a few examples to better demonstrate how widely this can vary.
- Ex. 1: Sally has a Will, which gives everything to her testamentary trust within her Will. Sally’s assets, which include life insurance policies, bank accounts, a house and land, and vehicle, are all set up in her name alone as the owner, without any survivorship rights, beneficiary designations, or any other legal mechanism to allow the ownership to vest in another living person upon her death. In this example, it would appear that all of Sally’s assets are controlled by the terms within her Will and Testamentary Trust. In order for these terms to be legally enforceable, the original Will must be submitted for probate.
- Ex. 2: Sally has a Will, which gives everything to her testamentary trust within her Will. Sally’s assets, which include life insurance policies, bank accounts, a house and land, and vehicle, have appropriate legal mechanisms in place to allow them to bypass probate and immediately pass to another person upon her death. Under these circumstances, while Sally’s Will should be probated, the terms of the Will and Testamentary Trust have little to no bearing on the assets described in this example. The terms of the Will and Testamentary Trust would only come into effect should new estate assets be discovered.
The probate court can help further ensure the trust instructions are followed, including appointing the trustee and transferring assets into the trust.
Assets held in the trust can include money, real property, or even proceeds from a life insurance policy, if no beneficiary is named on the policy itself
Why Use a Testamentary Trust?
A testamentary trust offers several benefits, depending on your estate planning goals:
- Asset protection: The trustee manages trust funds, ensuring they are used as the deceased wanted. Depending on the circumstances, a testamentary trust may offer an additional level of third-party oversight that may otherwise not apply to an administration of a living trust
- Support for young children: If minor children are beneficiaries, the trust can ensure they only receive money when they reach a certain age or upon a specific event.
- Professional management: A financial advisor or professional trustee can help generate income or preserve trust assets for long-term benefit.
- Charitable giving: You can include instructions to support charities or causes you care about.
Managing the Trust
After the trust is created, the trustee manages the trust assets.
This involves making distributions to beneficiaries according to the trust instructions and ensuring funds are used for their intended purpose, such as educational expenses or living costs.
For example:
- A child reaches a certain age to receive their inheritance in full.
- A separate trust supports a family member’s medical or living expenses.
Costs and Considerations
While testamentary trusts can provide asset protection and control, there may be additional side effects, such as legal fees and court costs.
Since a a testamentary trust is subject to the probate process, , there is a lower level of privacy. Certain details involving the persons and assets involved may become part of the public record.
While this may be viewed negatively, an additional level of oversight can be a good thing if you have concerns with who manages your assets. Regardless of the type of trust involved, avoiding the public record altogether is not always feasible, even under the best of circumstances.
Assets left under a Will to a minor person without any terms or protections in place, such as a testamentary trust, can create fairly substantial legal complications.
These complications may prove counterproductive if your goal is to benefit your minor beneficiary. In some situations, the legal issues involved with rectifying the situation exceed the value of the asset itself. A testamentary trust can greatly minimize legal complications your loved ones may experience if done in an effective and thoughtful manner.
If privacy is a concern, you might explore options like a revocable living trust or inter vivos trust, which can help minimize the type of assets subject to a (public) probate process. .
If you’re ready to secure your future and protect what matters most, let us help you get started. Call Hopler, Wilms, and Hanna today at (919) 244-2019 to schedule a consultation.
We’re here to make the process simple, effective, and personalized for your needs.
When Does a Testamentary Trust End?
A testamentary trust lasts until the trust instructions are fully carried out or a specific event occurs. Events could include the trust funds being fully distributed or the trust expiring.
For example, a trust might end when a child reaches a certain age or after all educational expenses have been paid.
Is a Testamentary Trust Right for You?
If you want to protect assets for your beneficiaries or provide structured support for young children, a testamentary trust can be a valuable tool in your estate planning.
Speaking with an estate planning attorney can help you determine whether this option aligns with your goals and family needs.
Estate Planning With a Testamentary Trust
Planning your estate involves more than just creating a testamentary trust.
While testamentary trusts offer structured management of assets after your death, a comprehensive estate plan ensures every aspect of your wishes is addressed.
In North Carolina, it’s essential to include several key components to protect your loved ones and streamline the legal process.
Importance of a Last Will and Testament
A last will and testament is the foundation of most estate plans. It names a trusted individual as your executor to oversee the probate process and ensure your assets are distributed according to your wishes.
Without a will, the probate court determines asset distribution, which might not align with what you wanted.
Your will should include clear instructions about how to manage assets, provide for beneficiaries, and create a testamentary trust if needed.
For minor children, your will also allows you to name a guardian to care for them in your absence.
Role of Living Trusts in Estate Planning
While a testamentary trust is created through your will, a living trust (or inter vivos trust) can help you manage assets during your lifetime.
Living trusts are often used to avoid the probate process and provide immediate access to funds after your death. Unlike testamentary trusts, living trusts remain private and don’t become part of the public record.
- A revocable living trust is a helpful estate planning tool if you want flexibility to adjust the trust during your lifetime.
- An irrevocable trust, on the other hand, offers greater asset protection but cannot be easily changed.
Healthcare Directives and Powers of Attorney
In addition to trusts and wills, estate planning includes documents to manage your healthcare and finances if you become unable to make decisions for yourself. These include:
- Healthcare power of attorney: Names someone to make medical decisions on your behalf.
- Financial power of attorney: Grants someone authority to handle your financial matters, such as paying bills or managing investments.
- Advance Directives and living will: States your preferences for medical care, ensuring your wishes are honored.
These documents provide clarity and prevent disputes among family members during difficult times.
Planning for Asset Distribution and Management
Beyond naming beneficiaries, it’s important to plan how your assets will be managed and distributed.
Testamentary trusts offer the advantage of structured distributions, especially when dealing with:
- Minor children who cannot handle large sums of money.
- Educational expenses that need to be paid over time.
- Family members who may require support for specific events or needs.
Including clear trust instructions ensures beneficiaries receive assets at the right time and under the right conditions.
Tax Planning and Professional Guidance
Effective estate planning can also reduce potential tax burdens on your beneficiaries.
Consulting an estate planning attorney helps you navigate tax laws and structure your plan in a way that maximizes asset protection.
They can advise on whether creating multiple trusts or an irrevocable trust might be beneficial for your specific situation.
Coordinating All Elements of Your Estate Plan
A well-rounded estate plan ties all these elements together to protect your loved ones and ensure your wishes are carried out.
Naming a reliable executor, creating trusts, and including powers of attorney all work together to provide peace of mind.
Reviewing your estate plan regularly and updating it as your circumstances change helps ensure everything remains aligned with your goals.
By taking a thoughtful approach, you can manage assets, support your family, and create a legacy that lasts beyond your lifetime.
Experienced Help With Your Estate Planning Needs
At Hopler, Wilms, and Hanna, we understand how overwhelming it can feel to plan for the future.
Whether you’re thinking about protecting your loved ones, managing your assets, or planning for unforeseen circumstances, we’re here to guide you every step of the way.
Tailored Estate Planning for Your Unique Goals
Your estate plan should reflect your personal goals and the needs of your family. We help you create a plan that ensures your wishes are honored, and your assets are distributed as you intend.
From preparing wills to designing trusts, we craft customized solutions for:
- Avoiding probate and keeping your financial affairs private.
- Protecting assets from creditors or legal challenges.
- Providing for loved ones, including minor children and dependents with special needs.
- Supporting charities or causes close to your heart.
Strategic Use of Trusts
Trusts are a powerful tool for managing your estate and planning for the future.
Whether you need a simple trust or a more complex arrangement, we help you decide what works best for your situation.
Our services include:
- Setting up revocable living trusts for flexibility during your lifetime.
- Creating irrevocable trusts to offer long-term asset protection.
- Designing specialized trusts for unique circumstances, such as caring for pets or supporting a family business.
- Planning for tax advantages and ensuring smooth asset distribution.
Guidance Through Complex Decisions
We know that estate planning involves more than just documents. It’s about peace of mind and knowing your loved ones are cared for and your legacy protected.
Our attorneys provide:
- Clear explanations of legal processes so you fully understand your options.
- Step-by-step assistance in naming executors, trustees, and beneficiaries.
- Advice on structuring trusts to meet your financial and personal goals.
Take the First Step Today
If you’re ready to secure your future and protect what matters most, let us help you get started. Call Hopler, Wilms, and Hanna today at (919) 244-2019 to schedule a consultation.
We’re here to make the process simple, effective, and personalized for your needs.