If you are considering engaging in estate planning or you may be inheriting assets, it is important to understand what the step-up in basis is and how it may affect you.
There are various benefits to creating a testamentary trust. This article discusses the benefits of adding a testamentary trust to your estate plan.
What Is a Testamentary Trust?
A testamentary trust allows a testator to manage wealth by giving a trustee instructions for distributing their property after the trustee’s death. A testamentary trust is a part of the testator’s last will and testament.
Wealth Management and Asset Protection
A testamentary trust helps with overall wealth management by protecting the testator’s assets after their death. This type of trust can be used to name minors as beneficiaries of the testator’s estate. A testator can use it to ensure that the beneficiaries only receive assets after they reach a specified age. This reduces the chance of waste or misuse of assets.
Testamentary trusts have tax benefits. For example, if assets are placed into this type of trust, the beneficiaries are not required to pay taxes on the income generated and distributed from the trust twice. This is known as double taxation. However, if the trust earns more than $600 in income per year, the beneficiaries may be required to file a tax return for that year.
There are also capital gains tax benefits to placing assets into a testamentary trust. A person who sells an asset for profit may be required to pay a capital gains tax on the income generated from the sale. However, if legal ownership of an asset is transferred from one person to another through a testamentary trust, the capital gain received by the beneficiary is disregarded.
Keep in mind that testamentary trusts do not avoid probate. Probate is the legal process that courts use to ensure that the assets claimed by the estate are owned by the testator, that any creditors making claims against the estate have valid claims, and that the appropriate heirs receive the property listed in the trust. This means that estate taxes may not be avoided even if assets are placed into a testamentary trust.
Speak to a qualified tax professional or accountant to answer any questions you have about your tax obligations.
Trust Terms Can Be Changed During the Testator’s Life
The terms of a testamentary trust do not become effective until after the testator’s death. If your needs change or you gain or lose assets, you can return to the trust and adjust it accordingly. The malleable nature of a testamentary trust is also helpful if you have more children or your marital status changes.
No Effect on Pension Plans
Creating a testamentary trust does not affect your pension plan. If you name your child as a beneficiary of a testamentary trust, their access to their full pension plan benefits will not be affected.
Easy to Create
Testamentary trusts may be the easiest estate planning tool to create aside from a last will and testament. They can be included in your will at the time you draft it or can be an easy addition to the document at a later date.
Connect with your estate planning attorney for more information.