Do You Need a Testamentary Trust?

Orange City Iowa Estate Planning

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Utilization of a testamentary trust for the surviving spouse is an excellent idea, whether the survivor is the husband or wife.

An article from the Post Register writes about a couple who is doing some retirement planning. An estate planning attorney helped them prepare an updated will and medical power of attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.  Do they need a trust as part of their estate plan?

Maybe.  But there’s a few things you need to know before you make your decision.

First, there are many different types of trusts. A living trust could also be known as revocable trusts, irrevocable trusts and testamentary trusts. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit your assets?

Not if you plan for them.

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families where there may be children from other marriages.

Trusts are also valuable to distribute assets if there are: beneficiaries with an inability to manage money, undue spousal interference, or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

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