Understanding how testamentary trusts work

When a client in Wisconsin discusses estate plans with their advisor, the advisor may mention a testamentary trust. This type of trust assigns a trustee to divide the assets. Testamentary trusts are commonly used to reduce tax liability and allow asset management to be handled by a professional. Here are some things to know about testamentary trusts.

Definition of testamentary trust

testamentary trust is part of the last will and testament with the terms outlined in the will. It becomes effective after the settlor dies, which works similar to a living will. The settlor can make modifications in the trust all the way until they die, making it an irrevocable trust. The will has to be probated in court.

Some people make testamentary trusts because they want a beneficiary to get their assets at a certain time. Parents may use this type of trust if they prefer a child to inherit assets at a certain age

What do testamentary trusts involve?

A testamentary trust involves several parties. The grantor or settlor creates the trust that outlines when the assets get distributed, and the beneficiary receives the assets. The trustee remains in charge until the beneficiary receives the assets.

If a parent has a trust for a 3-year-old child, for example, the parent could name a relative, such as a brother or sister, as a trustee. The relative will be in charge of handling assets until the beneficiary reaches the age when they will inherit them.

Testamentary trusts involve a fourth party, which is the probate court. After the court validates the will, they will make sure the trustee handles the case professionally. The trustee may be required to go to probate court at least annually.

Estate planning may get complex when trusts are involved. In these cases, an estate planning and probate attorney may make the process run more smoothly.