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Advantages and Disadvantages of Creating a Testamentary Trust

Last updated on: June 26, 2024

Trusts can be created either during or after your lifetime. Trusts that are created after your lifetime are called testamentary trusts because they are established in your “last will and testament.” The trust is described in the will and all of the terms are often found in the will. In other situations, a testamentary trust can sometimes be created by referring to another document that actually creates the trust.

Like living trusts, testamentary trusts are overseen by a trustee and have specified beneficiaries. The trustee is bound by the terms of the trust and will distribute funds or property according to your specific instructions. This type of trust is often used by someone who is expecting a large life insurance payment or for those who have minor or disabled children. If you want to know more about Trust

Planning for the future and managing the distribution of your assets can be a complex process. It is recommended to speak with an experienced New Jersey trust attorney to set up and handle a testamentary trust effectively. At The Matus Law Group, our knowledgeable trust attorneys can provide clear, tailored legal guidance to help you navigate these intricate matters, such as choosing a trustee. We are committed to helping you ensure that your estate is managed and distributed according to your wishes after your passing. Contact us today at (732) 785-4453 to schedule a consultation and discuss how we can assist you.

Advantages of a Testamentary Trust

A testamentary trust is an often-used estate planning tool because of the many advantages that it offers.

  • Control over funding: One of the major reasons that individuals use a testamentary trust is because they want more control over how their loved ones will use their inheritance. For example, if you have a child that has poor spending habits, you can use the trust as a way to ensure that he or she will not squander their inheritance. In the case of a disabled child, a testamentary trust allows you to provide financial security for your child with someone else who you can trust to actually control the funds.
  • Tax advantages: In some cases, a testamentary trust can allow you to avoid estate taxes. It can also have certain tax benefits for the beneficiaries as well.
  • Simplicity: Developing a testamentary trust is relatively easy to do. It can be a part of your will, so it is easy to incorporate the trust into a will while you are creating the will or as a later addition. Extra costs or fees are then often taken out of the trust itself, so there are little upfront costs.

One of the most beneficial aspects of a testamentary trust is that it can be completely tailored to your needs. It is extremely flexible and can be as simple or complex as you would like. It fits well with the unique needs of those who have minor or special needs children.

Advantages of Testamentary Trust Description
Control over funding Provides control over how inheritance is used, preventing beneficiaries from squandering assets, especially useful for those with financially irresponsible beneficiaries or disabled children.
Tax advantages Offers potential estate tax avoidance and can provide tax benefits for beneficiaries, making it a useful tool for wealth preservation and minimizing tax liabilities.
Simplicity Easy to establish as part of a will, allowing for customization to fit individual needs, with minimal upfront costs and the ability to adjust complexity based on preferences and specific circumstances.

Disadvantages of a Testamentary Trust

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 upfront, there are costs that you will need to consider for the sake of the beneficiaries and the trustee. For example, the trustee may be required to regularly report the trust assets or appear in court to make regular reportings. Legal fees for maintenance are also a factor that you may need to consider, depending on the complexity of the trust.
  • Problems with trustees: In a testamentary trust, the designated trustee has the option to turn down the role. That can mean that the probate court will name someone else to be the trustee. The trustee could end up being a complete stranger in some cases. It is important to discuss your plans with your prospective trustee to avoid this type of situation.

There may be other drawbacks to a testamentary trust that vary depending on your particular situation as well. Find out more by calling The Matus Law Group at (732) 281-0060.

What is the Biggest Risk Inherent in the Proposed Testamentary Trust?

A testamentary trust, by design, is created according to instructions outlined in a person’s will, and it only comes into effect after their death. This timing is crucial and brings with it the primary risk: the potential for the trust not to be executed precisely as the deceased intended.

The core of this risk lies in the clarity and completeness of the instructions left in the will. If these instructions are ambiguous or incomplete, there may be significant challenges in setting up the trust to fully reflect the deceased’s wishes. Additionally, since the trust cannot be established and reviewed by the person, who made the will, during their lifetime, any errors or omissions in the will cannot be corrected after the fact.

This can lead to disputes among beneficiaries or between beneficiaries and the trustee, who is responsible for administering the trust. Such disputes can not only delay the distribution of assets but also result in legal challenges that could potentially alter the intended effect of the trust.

Moreover, the effectiveness of a testamentary trust is heavily dependent on the skill and integrity of the executor of the will and the trustee appointed to manage the trust. If these individuals do not adhere closely to the legal and personal guidelines set out in the will, the trust’s administration may not align with the deceased’s original intentions.

For anyone considering setting up a testamentary trust, it is crucial to consult with a knowledgeable trust attorney who can help craft clear, comprehensive instructions and select trustworthy individuals to execute and manage the trust. This approach minimizes the risk of misinterpretation and mismanagement, helping to ensure that your wishes are honored.

New Jersey Trusts: Income Tax Implications

Taxes, like all things financial, are a concern for a lot of people. In New Jersey, trusts can have serious tax implications. The tax consequences for trusts will vary depending on which trust a person is using. Simple trusts, which are trusts that are required to distribute their income annually, are subject to different taxation than Complex trusts. Complex trusts do not have to distribute all their income within one year but can accumulate trust income year after year.

The trust beneficiary and the trust are two separate entities for tax purposes. The trust beneficiary may also have to file income tax returns and pay income tax. Both the trust and trust beneficiary are subject to income tax for the number of taxable earnings that they receive or retain.

Income that must be distributed to the beneficiary of a trust is subject to personal tax, regardless of whether it is actually received.  The trust pays income tax on income that accumulates in the trust. The trust will receive a distribution deduction when the income passes to the beneficiaries, and the beneficiaries are required to pay tax on the distribution. 

To learn more about the tax implications involved in your New Jersey trust, speak to an experienced New Jersey trust attorney at the Matus Law Group at (732) 281-0060.

Christine Matus

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Christine Matus

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