What should you include in a testamentary trust?

Date: Mar 04, 2015

Testamentary trusts are an important consideration for anyone undertaking the estate planning process. However, testamentary trusts are also a poorly understood area of the law, which makes it important for individuals to take the time to understand what is involved with this option and what benefits accompany it.

A testamentary trust is basically a trust established to provide ongoing financial support for a person's relatives once they have passed away. These assets will be held in trust and managed by a trustee, with the proceeds distributed to those named as beneficiaries.

So what are the benefits of establishing a testamentary trust? Here are two of the most important:

1) Greater protection for assets

Among the main concerns individuals can have when they undertake the estate planning process is that their assets will not be protected for future generations if they are left directly in the control of the beneficiary. For whatever reason, individuals will occasionally feel that transferring their possessions directly to a relative may not be an appropriate long-term solution.

In this situation, a testamentary trust can be a solution to this issue. By protecting these assets through a trust structure, individuals can arrange it so their relatives receive ongoing financial support while ownership of the asset may be protected in a separate legal structure.

Establishing a testamentary trust also allows assets to be passed on to subsequent generations, rather than relying on the asset planning efforts of the immediate beneficiary. This means they represent a long-term solution that can provide for multiple generations.

2) Avoiding changes in a beneficiary's financial position

As well as separating ownership of assets from the beneficiary, a testamentary trust can be a useful addition in a situation where the financial position of the recipient may change.

For example, if a beneficiary goes through a divorce and assets aren't contained within a trust, these may become part of the joint property of the couple and then be separated as part of a divorce financial settlement. On the other hand, if these assets are held in trust, they may not automatically be considered the joint property of a relationship and therefore may not be affected by a divorce.

The use of a testamentary trust may also afford the beneficiary additional protection in cases of bankruptcy.

For more on establishing a testamentary trust, or to learn more about the estate planning process, make sure to discuss this with a wills and estates lawyer.