What is a Testamentary Trust?
Testamentary Trusts are Trusts created in the body of an individual’s Last Will and Testament. The Trust does not officially exist until the Will is probated. Testamentary Trusts are often created to provide for management, tax advantages, or both. Providing for property to pass in Trust may be appropriate for minors, disabled adults, those needing creditor protection, or those perceived by the individual creating the Will to lack management skills.
What is a Bypass Trust?
If you and your spouse’s combined estate exceeds $27,220,000, consider investing in a bypass Trust. If you leave everything to your spouse, you get a full marital deduction, but that amount will be taxed upon your spouse’s death. With a Bypass Trust, however, at your death, your assets will be held in Trust for the benefit of your spouse and descendants. At your spouse’s death, the Bypass Trust property is not taxed as part of your spouse’s estate. You have essentially doubled the exemption amount.
What is a Life Insurance Trust?
Life insurance proceeds are included in your taxable estate if you “own” the policy. If you have the power to change the life insurance beneficiary designation, you are deemed to own the policy. If, however, you transfer the policy to an irrevocable Trust with instructions to leave the beneficiary designations as is, after three years, you will no longer be deemed to own the policy, and the proceeds will be entirely exempt from estate taxes. On a policy, this will save substantial estate taxes.
What is a Living Trust?
A living Trust is designed to dispose of your property at death instead of through a Will. In order for this to occur, property must be transferred into the Trust before death. You should consider a Living Trust if (1) you want to give someone full authority to manage your assets if you become mentally disabled, (2) your Will is likely to be challenged, or (3) you want to keep your estate completely private. It is also important to know that establishing a Living Trust costs more than a Will and that it is difficult to maintain on your own. A Living Trust is also useful if you own real estate outside of Texas and want to avoid probate; however, in Texas, probate can be fast and inexpensive, so it is best to review your situation with your attorney.