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According to a recent Charles Schwab study, most Boomer millionaires want to enjoy their wealth during life – more so than millionaire Millennials and Gen Xers. In contrast, younger millionaires tend to begin transferring wealth to beneficiaries during life. The study showed that about 20% of Boomers want to share their wealth with family before passing, compared to 44% of Gen Xers and 53% of Millennials. Different generations approach estate planning in different ways, with most Boomers opting for wealth transfers after passing away. In this post, we’ll review how a testamentary trust represents one way to facilitate this type of transfer.
A testamentary trust represents one method of transferring wealth after death. Why would someone want to delay this transfer instead of sharing wealth during life? Many seniors may want to prioritize their own needs, especially during periods of economic uncertainty and rising living costs. Although wealthy seniors may feel confident about their finances as they approach retirement, there is no way to predict what the future might bring. Lawsuits, bad investments, and unexpected medical costs could all drain retirement savings. Delaying wealth transfers until after death ensures seniors will have more economic security to handle these unexpected threats.
Many seniors are concerned about sharing their life savings with financially irresponsible adult children, and testamentary trusts may include spendthrift provisions that go into effect after death. In some cases, it may be impossible to transfer wealth during life. These transfers might be unsuitable for parents with very young children, as their beneficiaries would be too young to use the funds.
When someone puts a testamentary trust into motion, they do not actually “create” a trust. Instead, they create instructions in their Last Will and Testament to establish the trust after their passing. Once a grantor (the person who creates the trust) passes away, the testamentary trust goes into effect. Instructions in the Will determine which assets move into the testamentary trust, and a predetermined trustee begins overseeing these assets. Depending on the conditions of the trust, beneficiaries may begin inheriting these assets immediately or gradually over time. In the case of minor beneficiaries, the trustee may need to delay wealth transfers until after the children reach the age of 18, complete their post-secondary education, or satisfy any other pre-determined condition.
According to the Mahoning County Probate Court, a testamentary trust can also facilitate wealth transfers to charitable organizations. A grantor may leave only certain assets in a testamentary trust after their passing, combining this with other estate planning strategies (including inter vivos trusts and pour-over Wills). Grantors may establish numerous testamentary trusts in a single Will.
Many Ohio residents are reluctant to create trusts because of the costs involved, even if these costs may be outweighed by tax benefits and reduced legal fees. One of the key benefits of a testamentary trust is the elimination of most up-front costs. Grantors do not create testamentary trusts during their lifetimes, and only establish instructions for these trusts in their Wills. Compared to trusts, Wills are more affordable estate planning documents. The costs of establishing a testamentary trust only arise after the grantor passes away, and the beneficiaries will need to subtract these fees from their inheritance. This approach allows Ohio residents to enjoy more of their wealth during life.
Another key benefit of a testamentary trust is its flexibility. Because the trust has not yet been created, a grantor can adjust it during life by simply revising their Will. These adjustments should be relatively affordable and easy – and they may be necessary after certain life changes. For example, a parent might want to establish new conditions for an adult child who develops a substance abuse or gambling problem. They may also want to adjust the conditions of their testamentary trust after an adult child marries someone new – particularly if a future divorce seems likely. Consider speaking with Rhodium Law, LLC to learn more about potential estate planning issues caused by the divorce of a beneficiary. If grantors achieve greater economic security during life, they may eventually choose to establish a living trust instead and eliminate their testamentary trust – thereby eliminating trust-creation costs for their beneficiaries.
The key disadvantage of a testamentary trust is the need for probate. The instructions for the trust-creation process lie in the Will, and this Will must go through probate before the trust goes into effect. Probate can be a costly and time-consuming endeavor, and many Ohio residents attempt to avoid the process entirely. Normal trusts allow beneficiaries to avoid probate, thereby streamlining inheritance and reducing costs for beneficiaries. Parents who want to make inheritance as easy as possible for their beneficiaries may consider other estate planning methods.
Another potential downside is the public nature of a Last Will and Testament. The instructions for a testamentary trust must contain a full description of certain assets in the family estate, and some may wish to keep this information private. Confidentiality could be a particularly important priority for celebrities, politicians, business leaders, or anyone else with a public persona. If the public becomes aware of the assets in a family estate, this could attract the wrong kind of attention.
The decision to delay wealth transfers until after death is a perfectly valid one. Although sharing wealth during life has become more popular among younger generations, a testamentary trust offers numerous benefits that may prove attractive to estate planners of all ages. That being said, the most appropriate estate plan depends entirely on the priorities and goals of each family. Online research may provide a basic overview of testamentary trusts, but further analysis might help families determine whether this is truly the right option. Families may speak directly to an Ohio estate planning lawyer to assess the suitability of testamentary trusts in more detail. Consider contacting Rhodium Law at (216) 699-8145 or schedule a consultation to continue this discussion.
