Many people want to ensure that after their death, children or survivors will not suffer financially. However, according to a LexisNexis report, more than half of American adults do not have a will in place, which can lead to a lengthy and complicated probate process.
There are a number of ways to set up financial plans to prevent family members from a messy court battle. When doing their estate planning, people in Illinois should consider a testamentary trust as a reliable option.
How it works
As The Chicago Bar Association points out, a testamentary trust may be changed as often as the owner wishes, as it does not go into effect until after the owner passes away. This type of trust will enable the owner to allot assets to children or other beneficiaries based on certain conditions. These types of trusts are often employed in situations such as the following:
- People with young children
- People who have relatives with disabilities
- People who have a large sum of money to leave to heirs
Minors are not able to receive substantial gifts of money directly, which is often why people choose to utilize a trust. Through a testamentary option, owners can designate a trustee of the gift until the minor reaches the age that is outlined in the trust. Many are created with expiration dates, such as when a beneficiary gets married or turns 25. The owner of the trust can choose when and if it will expire.
Tax advantages
One of the most common reasons that people choose to set up a testamentary trust is because it offers key income tax advantages. Any taxable income that someone receives through a testamentary trust would only fall subject to the same graduated tax rates that an individual would pay. This is especially helpful for people with a high marginal tax rate, because the income from the trust may be taxed as a separate entity instead of adding the sum to the person’s existing income.
Things to consider
Due to their nature, testamentary trusts are often contained in a will. It is important to keep in mind that unlike living trusts, a testamentary arrangement will still have to go through probate. Additionally, it is possible for these trusts to become public because it is part of a will. Lastly, a testamentary trust does not provide for a situation in which the owner becomes incapacitated, as a living trust might. However, these trusts may give people peace of mind knowing that their assets will be handled as they wish following their death.