Tag Archives: testamentary trusts

Avoiding a Lump Sum Inheritance

pot of goldDear Liza My father wants to leave some of his assets to my brother and sister, however neither of them is particularly adept at handling money and he doesn’t want to hand them a large, lump sum. Can a Will stipulate that they receive payments on a predetermined basis, almost like an allowance? If not, can this be accomplished through another vehicle?

Your father isn’t the only parent worried about leaving money outright to kids.  He has a few options. Your father can leave money in his Will to a trust for the benefit of your brother and sister, and specify how the money is to be distributed to them. The trust itself is a part of the Will.  Leaving money in a trust by way of a Will is called a “testamentary trust,” because the trust is established after your father dies. This will require a probate proceeding in most states.

Alternatively, your father can create a trust now, and in that trust he can distribute assets to trusts for your siblings as well. This will accomplish the same result, but avoid a probate proceeding at your father’s death. Lastly, your father could, in a Will or a trust, instruct the executor or Trustee to purchase an annuity for your siblings upon his death, that pays out a certain amount of money over a certain period of time, or, he could purchase an annuity like that during his lifetime, to be paid upon his death.

What’s a Testamentary Trust?

IRA moneyDear Liza:  I’ve read that I could create a trust for my children in a Will, then name that trust as a beneficiary of my retirement account.  That way, as I understand it, my successor Trustee could manage those retirement assets for my children until they grow up. But if I do that, will my estate have to go through probate before that trust can be established? Yes, in order to establish a trust that’s created by a Will, your estate would have to go through probate first.  What you are describing is called a ‘testamentary trust’ because the trust is created by a Will. The order issued by the court at the end of the probate will incorporate the terms of that trust.

To avoid probate altogether, you should use a living trust to create a trust for the benefit of your children, and put your assets in that trust before you die. You can name that trust as a beneficiary of your retirement account, and, after your death, the successor Trustee will work with the plan administrator for that retirement account to transfer the assets into the trust for your children.  That being said, if your children are over eighteen, it’s easier to name them directly as beneficiaries, rather than work through the medium of a trust–which has a slightly different set of rules for how the required minimum distributions are calculated.