Pamela and Daniel had been married for twenty-five years. Both had children by a previous marriage. They owned substantial acreage in Somervell County, one tract which Pamela inherited from her father, one tract that she and Daniel purchased after they married. They considered themselves comfortable but not wealthy. They were up on the current estate tax exemptions, so they knew, assuming the estate tax exemption stayed the same, their estates wouldn’t be subject to estate tax. When they met with their lawyer to discuss making new wills, each expected to leave their property outright to the other spouse upon their deaths. They were surprised the lawyer advised them to establish a testamentary trust in their wills.
A testamentary trust is a trust that does not come into effect until the death of the person creating the trust. The testamentary trust provisions are incorporated into the will, with establishment made contingent upon the death of the testator.
There are multiple reasons to create a testamentary trust even, when avoidance of estate taxes is not an issue. Some include:
Protection Against Division in Divorce
A trust guards against property given to a child being lost through divorce, a crucial protection when more than fifty percent of today’s couples split. Although inherited property is separate property, in Texas, all property is presumed to be community property. That means that the person claiming property as separate must prove it is such by “clear and convincing evidence.” When separate property has been “co-mingled” with community property from failure to maintain adequate records to show its character as separate, the required proof may not be possible. In that case, the property becomes subject to a court’s dividing it with the opposing spouse in the divorce decree. If the property is given in trust, it is protected from division in divorce.
Protection Against Creditors
Pamela’s is aware that her son, Tom, is not a good money manager. He has come to her on more than one occasion to seek help with paying off credit card and other debt. The testamentary trust can and should contain a “spendthrift” provision which will protect its assets from a beneficiary’s creditors.
Protection Against the Trophy Wife or the Gigolo Husband
The lawyer explained that, if Pamela and Daniel leave their property or a portion of it in trust to each other and/or to their children, that property is protected from the surviving spouse giving that property to a new trophy wife or gigolo husband in a subsequent will. Though Pamela and Dan were convinced that circumstance wouldn’t happen, they admitted anyone can become vulnerable.
Protection Against Bad Investment
Daniel is aware that his son, John, has in-laws who are freewheeling investors. If he leaves John’s inheritance to him outright and they talk John into investing it in a risky investment, he could lose it all. That inheritance in a testamentary trust protects against that eventuality.
Protection Against Guardianship
Any one of Pamela or Daniel’s children could face incapacity and the need for a guardianship. If a guardian of the child’s estate is established that guardian would obtain control of any assets the child owns outright, while the trustee of the trust will maintain control over the child’s trust assets even if a guardian is appointed.
At this year’s seminar on Estate Planning, Stanley Johanson, a distinguished law professor at the University of Texas School of Law, recommended that all wills contain a contingent trust in the event that any assets are left to minors. Some estates may contain so few assets that a contingency provision leaving assets to a minor through the Texas Uniform Transfer to Minors Act (TUTMA) may be sufficient. The drawback to substituting TUTMA for a trust is that the minor obtains the assets at age 18, while a trust can delay the distribution to whatever time the creator of the trust deems appropriate for the given beneficiary.
After obtaining all the facts concerning each beneficiary, Pamela and Daniel determined that the assets in their testamentary trusts would be distributed to the all beneficiaries except Tom’s and John’s, at age 25. Distribution to these two would be delayed until they reached 35 in the hope that by that time maturity would have cured Tom’s tendency toward irresponsibility and John’s susceptibility to his in-laws’ speculative ventures.
Whatever the circumstances, it is important for the testator not to dismiss out of hand the idea of creating a trust in a making a will. Despite the fact that the expense of a will that includes a trust is more than that of a simple will, often the extra expense is well worth the advantages.
Sandra W. Reed is an attorney with Katten & Benson, an Elder Law firm in Fort Worth. She lives in beautiful Somervell County, near Chalk Mountain.