Many parents set up a testamentary trust to ensure their minor children (in the name of their guardians) receive a steady income. Other reasons to set up a testamentary trust include caring for a relative or other person with disabilities. Since the trust is considered its own entity, beneficiaries will not be taxed individually. Instead, the trust itself will be taxed separately from the individual beneficiaries.
Consider the value of your total assets to determine if a testamentary trust is warranted. If your assets are owned jointly with your spouse, you might not have enough in sole assets to have enough of a testamentary trust to be beneficial to you and your family.
2
Ask your attorney to execute your will with testamentary trust language included. Since the trust will not come into existence until your death, this is the best place to set up the testamentary trust.
3
Set up a testamentary trust for each of your beneficiaries. This will ensure that when taxes do come due, they will each be within the lowest possible tax bracket. If many beneficiaries benefit from one trust with a lump-sum amount, the tax bracket will be higher than the individual trusts.
4
Set up a spousal testamentary trust to care for your spouse after you pass away. This will give your spouse lifetime use of your money and assets and then pass what is left to the person(s) you choose after your spouse dies. For example, many people set up a spousal testamentary trust to pass to their children after their spouses die.
5
Draft your will at the same time as your spouse so the documents mirror each other and include language for spousal testamentary trusts. When one spouse passes away, the surviving spouse will want to look at her will again and provide for the testamentary trust to have new beneficiaries.
Tips & Warnings
Calculate the cost of raising a child each year (adjusting for inflation at 3 percent a year), multiplied by the number of years until that child reaches the age of maturity. The age of maturity is usually 18 years old. Do this math for each child and add the cost of each child together. Plan to have at least this amount set aside for the guardians who will raise your child should something happen to you.
A testamentary trust exists in your will only until your death, when money then passes to the trust.
Letters testamentary are sometimes known as letters of administration. Obtaining letters testamentary is one of the first steps of the probate process....
