Pros and Cons of Testamentary Trusts

A testamentary trusts should be included in estate planning. This type of trust is ideal for people who do not have a lot of financial assets during their lifetime, but are expected to bequeath a windfall of cash from life insurance plans or lawsuit settlements. Under a will trust, a trustee will be named or appointed to manage the specified assets upon the death of the trustor or creator of the will. The power of the trustee ends when the trust expires. Before you decide on creating this type of trust, it is important that you know its advantages and disadvantages.

Pro: Low Upfront Cost

This type of trust is popular because it is relatively inexpensive to set up. In this estate plan, you can specify the conditions of the trust to protect your beneficiaries without spending what you will pay to create a revocable living will.

Pro: Naming a Trustee

Many people prefer to have this type of trust because it allows for anyone to be named as trustee. You can choose any family member, or even a friend, to be appointed as trustee. This means that you can pick whoever you think has the qualities of an honest trustee. You want to choose someone that you depend on to invest the money in your trust. 

Pro: Tax Advantage

Your beneficiaries will not be required to pay penalty taxes for their inheritance, it is under 10,000 annually. In case your beneficiary receives more than $10,000 a year, they will only pay regular income taxes on the excess amount. If you have several beneficiaries, each one can enjoy yearly tax-free trust disbursements of up to $10,000. An ordinary family trust will accrue penalty taxes each time a beneficiary receives trust money in excess of $1,100 annually.

Cons: Cost of Maintenance

Probate courts require the appearance of the trustees in court, on a regular basis The courts have established these regulations to ensure that the trust is managed properly and responsibly. 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. Being a trustee is not easy because the job requires long-time commitment and the likelihood of facing legal liabilities. In case the candidate you named in your will does not accept his assignment as trustee, the probate court can name anyone. If this happens, there is no assurance that the person appointed by the court will honestly work for the best interest of your estate.

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