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Understanding Testamentary Trusts: A Quick And Simple Guide

Understanding Testamentary Trusts: A Quick and Simple Guide

There are several ways that a testator can choose to distribute their assets after they pass away. Some like the idea of selling everything and dividing the proceeds among their heirs, while others distribute different assets as is to different people or organizations. 

Meanwhile, there are those who prefer to have trusts, specifically testamentary trusts.

What are testamentary trusts, and how do they work? This article aims to explore those topics and more.

What Are Testamentary Trusts?

Testamentary trusts are established according to a last will or testament’s provisions. They are fiduciary relationships that permit a third-party trustee, such as a will and estate lawyer, to manage the assets on behalf of the trust’s beneficiaries.

Often, a grantor starts a trust when they are still alive. However, one or several testamentary trusts are established only after the testator passes away. In this wealth management strategy, the deceased’s assets are transferred to a trust and are only distributed to the beneficiaries if they meet certain conditions. 

Some testamentary trusts, for example, can state that the beneficiary can only access the assets when they reach twenty-one years old. At that point, the beneficiary can use it as they please.

Aside from ensuring the deceased’s assets are distributed correctly, testamentary trusts offer tax benefits. Compared to other trusts, testamentary trusts offer reduced estate tax liabilities and lower probate fees. Moreover, this type of trust provides protection from creditors.

What Are the Requirements to Create a Testamentary Trust?

Three parties are needed for establishing a testamentary trust: the trustor, trustee, and beneficiary. The grantor provides the assets for the trust; the trustee creates and executes the trust according to the grantor’s last will; the beneficiary receives the grantor’s assets when they satisfy the conditions stated in the will.

However, before a testamentary trust is created, the will has to go through the probate process, which is essential since it verifies the will and confirms its authenticity. It also names an executor or executrix if no one is named as such in the will.

Since testamentary trusts are only distributed after specific events, a trustee must manage it, from its creation to its distribution. The probate court may occasionally check on the trust to ensure that the assets are appropriately managed.

What Is the Difference between a Living and a Testamentary Trust?

Living and testamentary trusts manage and distribute a grantor or trustor’s assets. Both trusts require a trustee to look after the assets on their behalf. However, they differ on when they have been created and the grantor’s involvement in the trusts.

Living trusts are created during the trustor’s lifetime. Despite being alive, trustors will still leave the trust’s management to a trustee. But since the trustor is alive in this situation, they can appoint themselves as a trustee. It means that the trustor can have more involvement with the trust and manage it however they want.

Testamentary trusts are only created once the initial grantor passes. It limits their involvement in the trust to the provisions in their last will. Since grantors cannot manage the assets, they often name the wills and estates lawyer who helped them draft their will as their executor and trustee. Doing so ensures that the testator’s intent is carried out as best as possible.

Conclusion

Testamentary trusts are considered a good strategy for managing a deceased grantor’s assets. It ensures the assets are handled and distributed accordingly and offers tax benefits, probate advantages, and protection from creditors.

However, since testamentary trusts are established after a grantor’s passing, assigning the right executor and trustee is essential. That is why wills and estates lawyers are often named as executors and trustees. They carry out the tasks and ensure to execute the testator’s intent properly.

Ontario Wills is a trustworthy firm that houses some of the best wills and estates lawyers in Kanata. Contact us today for sound legal advice on wills, estate planning, and more. 

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