Part 9 of 11

What Is a Testamentary Trust?         

A testamentary trust is a provision in a will that appoints a trustee to manage the assets of the deceased. It is frequently used when the beneficiary or beneficiaries are children or disabled people. The trust is also used to reduce estate tax liabilities and ensure professional management of the assets.

How Does It Work?

A testamentary trust is created to manage the assets of the deceased on behalf of the beneficiaries. It is also used as a way of reducing estate tax liabilities and ensuring professional management of the assets of the deceased. The trust may, for example, direct that the assets may be accessed by a child of the deceased for educational expenses until the child reaches the age of 25, at which time the balance will be paid out. A testamentary trust might also be created to manage the charitable distribution of assets in accordance with the wishes of the deceased. 

What Is a Charitable Remainder Trust?

Another common use of an irrevocable trust is to accomplish charitable estate planning, such as through a Charitable Remainder Trust or a Charitable Lead Trust. If the Trustmaker makes the initial transfer of assets into a charitable trust while still alive, then the Trustmaker will receive a charitable income tax deduction in the year the transfer is made. On the other hand, if the initial transfer of assets into a charitable trust does not occur until after the Trustmaker’s death, then the Trustmaker’s estate will receive a charitable estate tax deduction.

What Is a Credit Shelter Trust?

Credit shelter trusts are trusts for affluent couples to minimize or avoid their estate tax fatalities by passing on proceeds from individual estates onto the partner’s estate. Although most of my readership have no use for this type of trust, it is designed so that couples can take full advantage of estate tax exemptions. In 2020, generation skipping transfer tax (GSTT) exemption was $11.58 million for individuals and $23.18 million for couples.

What Is a Generation-Skipping Trust (GST)?

Generation-skipping trusts are effective wealth-preservation tools for individuals with significant assets and savings. It is a legally binding agreement in which assets are passed down to the grantor’s grandchildren or anyone at least 37 ½ years or younger - bypassing the next generation of the grantor’s children. By skipping the opportunity to receive the assets, the children of the grantor avoid the estate taxes that would otherwise be due. Because a generation-skipping trust effectively transfers assets from the grantor’s estate to grandchildren, the grantor’s children never take title to the assets. This is what allows the grantor to avoid the estate taxes that would apply if the assets came into the possession of the next generation first. 

THOUGHT OF THE WEEK

You do not make the poor richer by making the rich poorer.