The Estate of The Union Season 4|Episode 8 is out now! Choosing the right trustee is one of the single most critical planning decisions you can make when drafting your trust.
In this episode of The Estate of The Union, Zach Wiewel speaks with Ann Lumley, Director of Probate and Trust Administration about the role of a trustee. They discuss how to carefully select a trustee, the type of criteria that is most important for such a role, and circumstances when a professional trust company is a better option for your planning needs. They also look at some of the mistakes that can occur and how they can have a major impact on our planning goals. It really is one of the most consequential planning decisions you can make!
In each episode of The Estate of The Union podcast, hosts and lawyers Brad Wiewel and Zach Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 4|Episode 8 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the links to listen to or watch the new installment of The Estate of The Union podcast. We hope you enjoy it.
Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.
A testamentary trust is a type of trust established through a last will and testament. Unlike a living trust, it doesn’t take effect until after the person’s death and only comes into existence during the probate process. There are pros and cons of testamentary trusts. These trusts can be a powerful estate planning tool for individuals who want to provide oversight and structure in how assets are distributed to heirs. Parents of minor children often use them, individuals concerned about a beneficiary’s financial habits, or those who want to protect assets from creditors or divorcing spouses.
However, testamentary trusts have limitations, primarily because they are subject to probate and are part of the public record. Understanding the advantages and disadvantages of this planning strategy can help you determine whether it aligns with your goals.
How a Testamentary Trust Works
A testamentary trust is created by including specific instructions in your will. These instructions name a trustee, outline how and when the trust assets should be used, and define who will benefit from the trust.
Since the trust is part of the will, it is subject to probate—a court-supervised process that validates the will and oversees the distribution of the estate. Only after the court finalizes probate does the testamentary trust become active.
The trustee then manages the assets according to the instructions, including paying for education, distributing funds over time, or restricting access until the beneficiary reaches a certain age.
Benefits of Testamentary Trusts
One of the primary benefits of a testamentary trust is the control that it affords. The person creating the trust (the testator) can set rules that continue long after death. This is particularly useful for:
Minor children who cannot legally manage money
Adult children with poor financial habits or substance abuse issues
Beneficiaries with disabilities who need long-term support
Families who want to protect their inheritance from lawsuits or divorce settlements
Because the trust is created after death, assets are not transferred or placed into it during the person’s lifetime, making it a simpler option for those who don’t want to manage a living trust.
Testamentary trusts also allow for the naming of a professional or trusted individual as a trustee, providing an additional layer of financial oversight and guidance for the beneficiary.
Drawbacks to Testamentary Trusts
Despite the control they offer, testamentary trusts have disadvantages. Since they are created through the will, they require probate, which can be a time-consuming, costly and public process.
The trust also cannot begin operating until the probate is concluded, which may delay access to funds during a critical period. If the trust is intended to support children or dependents immediately after death, this delay could create financial hardship.
Unlike revocable living trusts, which are created and managed during a person’s lifetime, testamentary trusts offer no opportunity to test or adjust the terms in advance. Once the testator passes away, the terms are fixed.
Finally, because testamentary trusts are part of the probate record, they may be more vulnerable to disputes or challenges from dissatisfied heirs.
Is a Testamentary Trust Right for You?
For some families, a testamentary trust offers the right balance of oversight and simplicity. It’s often chosen by individuals who have straightforward estates but want to add some protection for vulnerable heirs.
Others may benefit more from a revocable living trust, which avoids probate and offers greater privacy and flexibility.
Working with an estate planning attorney can help you understand the pros and cons of testamentary trusts, draft appropriate terms and create a plan that aligns with your goals and your family’s needs. If you would like to learn more about testamentary trusts, please visit our previous posts.
Freelancers and the self-employed must take a proactive approach to estate planning. These types of jobs operate without the safety nets provided by traditional employment. This independence brings freedom. However, it also adds complexity to financial and estate planning. From managing irregular income to protecting business assets, creating an estate plan ensures that your hard work is preserved and distributed according to your wishes.
Unlike salaried employees, freelancers often lack access to employer-sponsored benefits, such as life insurance, retirement plans, or disability coverage. Their business assets and personal finances are frequently intertwined, making careful planning essential to avoid unnecessary complications for heirs.
A well-crafted estate plan for freelancers addresses:
Transfer of business assets or intellectual property.
Continuity of income for dependents.
Minimization of taxes and legal hurdles.
Freelancers and the self-employed must create a plan that considers their unique financial circumstances and provides long-term security for loved ones.
Freelancers often rely on their business as their primary source of income. Without a plan, the value of that business could be lost upon their death. Key steps include:
Appointing a Successor: Identify someone to take over the business or handle its sale.
Creating a Buy-Sell Agreement: Outline how ownership interests will be transferred for partnerships or joint ventures.
Documenting Procedures: Maintain clear records and instructions to help successors understand ongoing operations or intellectual property management.
Freelancers often experience fluctuations in income, which can complicate traditional estate planning strategies. To account for this:
Establish a rainy-day fund to provide a financial buffer for your estate.
Work with an estate planning attorney to identify flexible asset protection strategies.
Consider annuities or investments that provide steady income streams for beneficiaries.
Unlike traditional employees, freelancers must set up their own retirement savings plans. Options include:
SEP IRAs or Solo 401(k)s: Tax-advantaged accounts tailored for self-employed individuals.
Roth IRAs: Flexible savings accounts that grow tax-free, offering greater liquidity for heirs.
Ensuring that retirement savings are properly designated to beneficiaries avoids complications later.
The self-employed often own valuable digital assets like intellectual property, domain names, or online portfolios. These assets must be included in your estate plan to ensure seamless transfer. Create an inventory of:
Login credentials for key accounts.
Ownership documentation for websites or digital products.
Instructions for transferring or licensing intellectual property.
Many self-employed generate income from intellectual property, such as writing, artwork, or designs. An estate plan should specify how copyrights, patents, or trademarks are managed after death. This may include:
Assigning ownership to heirs or beneficiaries.
Creating trusts to manage royalty payments.
Licensing or selling rights to preserve income streams.
The first step to creating an estate plan is drafting a will that distributes assets, business interests and personal property according to your wishes. Without one, state laws determine asset distribution, which can result in unintended consequences. However, there’s much more to an estate plan than just making a will.
Establish Powers of Attorney
Freelancers should designate a trusted person to handle financial and healthcare decisions, if they become incapacitated. Powers of attorney ensure continuity in managing personal and business affairs during emergencies.
Consider a Living Trust
A living trust can help freelancers avoid probate and ensure that assets are distributed efficiently. Trusts are beneficial for managing complex assets, like intellectual property or business income.
Secure Life Insurance
Life insurance provides a safety net for freelancers with dependents by replacing lost income and covering future expenses. Policies should be aligned with your estate plan to ensure that benefits are directed appropriately.
Reach Out to an Estate Planning Attorney
Freelancers should consult estate planning attorneys and financial/tax advisors to create a plan that addresses their unique circumstances. Regular reviews ensure that the plan evolves alongside income, assets, or family structure changes.
Freelancers and the self-employed must take a proactive approach to estate planning. You can ensure your hard-earned legacy benefits your loved ones by addressing business continuity, income fluctuations and digital assets. An estate plan tailored to your needs secures your financial future and provides peace of mind, knowing that your assets and values will be protected. If you would like to learn more about planning for the self-employed, please visit our previous posts.
When managing your estate, people often overlook intellectual property (IP). If you are an artist, inventor, or business owner, your IP can be one of your most valuable assets. Incorporating IP into your estate plan is crucial to ensure that it benefits your heirs, primarily through a testamentary trust. A testamentary trust can protect your intellectual property.
A testamentary trust is created as part of your will and only takes effect after you pass away. It allows you to name a trustee who will manage the trust’s assets, including your intellectual property, to benefit your chosen beneficiaries. According to Forbes, by establishing a testamentary trust, you choose how to handle your IP and ease the burden on heirs.
For those with valuable intellectual property—such as copyrights, trademarks, patents and trade secrets—a testamentary trust can effectively safeguard and distribute these assets after you’re gone.
Intellectual property is often complex and requires ongoing management. Here are a few reasons why a testamentary trust can help:
Ongoing Management Needs: IP may need someone with knowledge of the field to manage it properly. Your beneficiaries might not be familiar with your creations’ legal rights or value, so appointing a trustee ensures that someone experienced handles these responsibilities.
Protecting Financial Interests: If your IP continues to generate revenue (e.g., royalties from books, music, or inventions), a trustee can distribute these funds according to your instructions.
Avoiding Probate Delays: By placing your IP in a trust, the assets can bypass probate, ensuring that they are handled efficiently without long delays or court involvement.
According to Charles Schwab, it’s essential to identify the types of intellectual property you own. Some common forms of IP you might place in a testamentary trust include:
Copyrights: If you’ve created original works, like books, music, or artwork, a copyright allows you to control their use and distribution. These assets can be precious and may need careful management to ensure continued profitability.
Patents: For inventors, patents provide exclusive rights to their creations. By placing them in a trust, you ensure that they are protected and passed on to your heirs in a controlled manner.
Trademarks: Your brand’s name, logo, or symbols may be essential for business success. A testamentary trust can keep these assets intact and help manage any ongoing legal protections they require.
Trade Secrets: If you’ve developed formulas, customer lists, or other confidential business information, you can protect them with a trust. A trustee can make sure they remain confidential and continue to benefit your heirs.
Appointing a knowledgeable trustee is critical to the success of managing your IP. This person or organization will be responsible for protecting your intellectual property, ensuring registrations are maintained and continuing to enforce your rights. They will also distribute any income from the IP according to the terms laid out in the trust.
When setting up a testamentary trust for your intellectual property, you can specify how long the trust will last. For instance, if you own copyrights, these can last for 70 years after your death, which means the trust may need to remain in effect for decades.
Carefully think about the future value of your IP and when it might be best for your heirs to take complete control of the assets. You can set specific milestones, such as when your children reach a certain age or achieve educational goals.
Intellectual property can be a critical asset in your estate plan. However, it requires careful management to ensure that it benefits your loved ones. Using a testamentary trust, you can protect and leverage your intellectual property in ways that align with your values. If you would like to learn more about testamentary trusts, please visit our previous posts.
Even if your spouse has died and left all their assets to you and no estate tax is due, you still need to file an estate tax return. Doing so may save your family significant sums in estate taxes after your death, according to a recent article from Forbes, “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due).”
The estate tax is a one-time tax due nine months after the date of death. The federal threshold in 2023 is $12,920,000 for an individual. Many states have their own estate taxes, with thresholds ranging from $1 million in Oregon and Massachusetts to $12,920,000 in Connecticut. Your estate planning attorney can advise which assets are included in calculating this amount. For example, many people are surprised to learn that proceeds from their life insurance policies are taxable on their death, unless the policy is owned in an irrevocable trust.
No estate tax is due if your assets are left to your surviving spouse because of the unlimited marital deduction. You get an unlimited deduction for the assets left to your spouse. Spouses can leave any amount to their surviving spouse tax-free, whether $2 or $2 million. However, there are reasons to file an estate tax return. The law requires it, even if the value of your estate assets is below the filing threshold.
If you’ve done estate planning, your spouse most likely has a trust that will break into various sub-trusts upon her death. As the surviving spouse, you’ll need to fund those trusts and apportion assets to them, which is done through the estate tax return. The estate tax return establishes the value of what those trusts are funded with.
Critical tax elections. When you file an estate tax return for your spouse, you’ll make certain elections to determine what assets are included in your estate when you die.
Tax savings for heirs. If your spouse has not used up all their $12,920,000 exemption, you can lock in their unused portion and port it to your estate tax return when you die. The portability of the deceased spouse’s unused exemption could potentially save your children millions of dollars in estate taxes in the future.
The combined exemption for two spouses is currently $25,840,000. The federal estate tax rate can be as high as 40%. By locking in the unused exemption, you could save more than $5 million in estate taxes that would otherwise be due on your death. Even if your assets are not in the $12 million to $25 million range, this is still smart because your assets could increase in value, and the estate tax thresholds are scheduled to drop to $5 million in 2026 (adjusted for inflation).
More tax savings for grandchildren. If your spouse has yet to use all of their general-skipping transfer tax (GST Tax) exemption, you can lock in their remaining GST Tax exemption. The GST Tax is a 40% tax on assets, if you “skip” your children and leave them directly to your grandchildren or in a trust that will eventually be distributed to them. The amount of GST Tax exemption is the same as the estate tax exemption, $12,920,000 per person in 2023. Therefore, the amount is the same, but they are different taxes.
You need to file an estate tax return to ensure that you have complied with tax law. Work with an estate planning attorney who has experience handling probate and trust administration. If you would like to learn more about the estate tax, please visit our previous posts.
While trusts and Limited Liability Companies (LLCs) are very different legal vehicles, they are both used by business owners to protect assets. Understanding their differences, strengths and weaknesses will help determine whether protecting assets with a trust vs a LLC is best for your situation, as explained by the article “Trust Vs. LLC 2023: What Is The Difference?” from Business Report.
A trust is a fiduciary agreement placing assets under the control of a third-party trustee to manage assets, so they may be managed and passed to beneficiaries. Trusts are commonly used when transferring family assets to avoid probate.
A family home could be placed in a trust to avoid estate taxes on the owner’s death, if the goal is to pass the home on to the children. The trustee manages the home as an asset until the transfer takes place.
There are several different types of trusts:
A revocable trust is controlled by the grantor, the person setting up the trust, as long as they are mentally competent. This flexibility allows the grantor to hold ownership interest, including real estate, in a separate vehicle without committing to the trust permanently.
The grantor cannot change an irrevocable trust, nor can the grantor be a trustee. Once the assets are placed in the irrevocable trust, the terms of the trust may not be changed, with extremely limited exceptions.
A testamentary trust is created after probate under the provisions of a last will and testament to protect business assets, rental property and other personal and business assets. Nevertheless, it only becomes active when the trust’s creator dies.
There are several roles in trusts. The grantor or settlor is the person who creates the trust. The trustee is the person who manages the assets in the trust and is in charge of any distribution. A successor trustee is a backup to the original trustee who manages assets, if the original trustee dies or becomes incapacitated. Finally, the beneficiaries are the people who receive assets when the terms of the trust are satisfied.
An LLC is a business entity commonly used for personal asset protection and business purposes. A multi-or single-member LLC could be created to own your home or business, to separate your personal property and business property, reduce potential legal liability and achieve a simplified management structure with liability protection.
The most significant advantage of a trust is avoiding the time-consuming process of probate, so beneficiaries may receive their inheritance faster. Assets in a trust may also prevent or reduce estate taxes. Trusts also keep your assets and filing documents private. Unlike a will, which becomes part of the public record and is available for anyone who asks, trust documents remain private.
LLCs and trusts are created on the state level. While LLCs are business entities designed for actively run businesses, trusts are essentially pass-through entities for inheritances and to pass dividends directly to beneficiaries while retaining control.
Your estate planning attorney will be able to judge whether protecting your assets with a trust vs an LLC is the best option for you. If you own a small business, it may already be an LLC. However, there are likely other asset protection vehicles your estate planning attorney can discuss with you. If you would like to learn more about business planning, please visit our previous posts.
Not everyone wants to leave everything to their heirs without restrictions. Some want to protect money inherited from their own parents for their children or want to keep an irresponsible child from squandering an inheritance. For people who want more control over their assets, a testamentary trust might be useful, according to the recent article “What Is a Testamentary Trust and How Do I Create One? from U.S. News & World Report. A testamentary trust can also be used to leave assets to minor children, who may not legally inherit wealth directly. Are testamentary trusts a good idea?
Your estate planning attorney may have some other, better tools for you.
A testamentary trust is a trust created to hold assets created in a last will and testament. It does not become active until after a person dies and the will has been validated by probate court. Once this has happened, the trust is activated and the decedent’s assets are placed into the trust. At this point, the trustee is in charge of the trust’s management and asset distribution.
A testamentary trust is different from a living trust. The living trust, also known as a revocable trust, is created while the grantor (the person making the trust) is still living. When the person dies, the trust doesn’t go through probate and assets are distributed according to the directions in the trust.
Both testamentary and living or revocable trusts are used in estate planning. However, the living trust may have far more flexibility and be easier to manage for a very simple reason: testamentary trusts are part of the probate process, administered through probate for as long as they are in effect.
There are advantages and disadvantages to both kinds of trusts. The testamentary trust is often used to manage assets for minor children. It’s also a good tool if you’re worried about an adult child getting divorced and keeping the family money in the family. The long-term court oversight is more protective, which may be desirable, but it can also be more expensive.
The best reason for a testamentary estate? When someone involved in the person’s estate loves to get tangled up in litigation. Having to deal with probate court in addition to civil court might make a litigious family member a little less likely to bring a lawsuit.
Your will must contain specific directions for what assets go into the testamentary trust. Assets with beneficiary designations, such as life insurance policies and retirement accounts, don’t go into any trusts, unless a trust is designated as the beneficiary of the policy or account. They are instead distributed directly to beneficiaries outside of the probate estate.
Changing or annulling a testamentary trust is relatively easy while you are living—simply update your will to reflect your new wishes. However, once you have passed, the testamentary trust becomes irrevocable and may not be changed.
Are testamentary trusts a good idea for your situation? Your estate planning attorney will evaluate these and other estate planning tools to find the best solutions to protect you and your family. If you would like to read more about trusts in general, please visit our previous posts.
A bypass trust gives more flexibility in managing taxes. A bypass trust removes a designated portion of an IRA or 401(k) proceeds from the surviving spouse’s taxable estate, while also achieving several tax benefits, according to a recent article titled “New Purposes for ‘Bypass’ Trusts in Estate Planning” from Financial Advisor.
Portability became law in 2013, when Congress permanently passed the portability election for assets passing outright to the surviving spouse when the first spouse dies. This allows the survivor to benefit from the unused federal estate tax exemption of the deceased spouse, thereby claiming two estate tax exemptions. Why would a couple need a bypass trust in their estate plan?
The portability election does not remove appreciation in the value of the ported assets from the surviving spouse’s taxable estate. A bypass trust removes all appreciation.
The portability election does not apply if the surviving spouse remarries, and the new spouse predeceases the surviving spouse. Remarriage does not impact a bypass trust.
The portability election does not apply to federal generation skipping transfer taxes. The amount could be subject to a federal transfer tax in the heir’s estates, including any appreciation in value.
If the decedent had debts or liability issues, ported assets do not have the protection against claims and lawsuits offered by a bypass trust.
The first spouse to die loses the ability to determine where the ported assets go after the death of the surviving spouse. This is particularly important when there are children from multiple marriages and parents want to ensure their children receive an inheritance.
This strategy should be reviewed in light of the SECURE Act 10-year maximum payout rule, since the outright payment of IRA and 401(k) plan proceeds to a surviving spouse is entitled to spousal rollover treatment and generally a greater income tax deferral.
Bypass trusts are also subject to the highest federal income tax rate at levels of gross income of as low as $13,550, and they do not qualify for income tax basis step-up at the death of the surviving spouse.
However, the use of IRC Section 678 in creating the bypass trust can eliminate the high trust income tax rates and the minimum exemption, also under Section 678, so the trust is not taxed the way a surviving spouse would be. There is also the potential to include a conditional general testamentary power of appointment in the trust, which can sometimes result in income tax basis step-up for all or a portion of the appreciated assets in the trust upon the death of the surviving spouse.
A bypass trust gives more flexibility in managing taxes. Every estate planning situation is unique, and these decisions should only be made after consideration of the size of the IRA or 401(k) plan, the tax situation of the surviving spouse and the tax situation of the heirs. An experienced estate planning attorney is needed to review each situation to determine whether or not a bypass trust is the best option for the couple and the family. If you would like to learn more about bypass trusts, please visit our previous posts.
If a married couple is creating its estate plan, then how does the couple leave the estate to non-adult grandchildren? What if something were to happen to them before the grandchildren become adults? Can this couple make sure the minor grandchildren do not get control of any inheritance until they’re adults? There are options to give assets to minor grandchildren.
Nj.com’s recent article entitled “How can I leave my money to my minor grandchildren when I die?” says that one way to solve these issues is to create a testamentary trust to provide for young beneficiaries whether they’re children, grandchildren, step-children, or unrelated beneficiaries. The terms of a testamentary trust are in your will. It is only established and funded after you pass away.
The terms of the trust generally provide instructions to the trustee about the ages at which distributions must be made, if any. These instructions also allow the trustee to make discretionary distributions of income and principal to the beneficiaries.
Beneficiaries do not need to be identified by name or need to be born at the time the will is written. However, they must be able to be identified upon your death. As a result, you can provide a bequest to all of your grandchildren, whether or not they are born yet.
It doesn’t matter where your grandchildren live as far as estate planning is concerned. However, if they live outside the United States and the bequest is considerable, the laws of their home country should be addressed. This is because a big gift may cause adverse tax implications to the recipient.
For children, some states’ laws allow you to add a term in your will that penalizes any interested person — like an heir or beneficiary — for contesting the will.
However, if there’s probable cause initiating a proceeding concerning the estate, then the clause will not be enforced.
When a person names another as primary beneficiary, they should also name one or more contingent beneficiaries, so that if the first person predeceases him or her, they will not have to revise the will.
If you do not designate a contingent beneficiary, and an heir predeceases, the assets pass according to the state’s intestacy statute rather than according to the will. You have options to ensure assets you give to minor grandchildren are honored after you pass. An experienced estate planning attorney will help you draft a testamentary trust that is right for you. If you would like to learn more about testamentary trusts, please visit our previous posts.
For most families, estate planning is a relatively straightforward task, protecting loved ones and preparing to distribute assets. But when parent-child relationships have frayed or fractured, estate planning becomes more complicated and emotional, according to the article from The News-Enterprise titled “Estate planning must account for estranged children.” This poses the question of how to address an estranged child in your planning.
The relationship may be broken for any number of reasons. The child may have married an untrustworthy person, have addiction issues, or have made a series of hurtful decisions. In some families, the parents don’t even know why a break has occurred, only that they are shut out of lives of their children and grandchildren.
The reason for the estrangement impacts how the parents address their estate plan regarding the child. If there is an addiction problem, the parents may want to limit the child’s access to funds, and that can be accomplished with a trust and a trustee. However, if the situation is really bad, the parents may wish to completely disinherit the child. Both require considerable legal experience, especially if the child might contest the will.
There are three basic options for dealing with this situation.
One is to leave an outright gift of some kind, with no restrictions. The estranged child may receive a smaller inheritance, but not so small as to open the door to litigation.
Second, the parent may create a testamentary trust in their last wills. Testamentary trusts become effective at death, with funds going into the trust and controlled by a trustee. The heir will have no control over the assets, which are also protected from creditors, divorces, or scammers.
Third is the option to completely disinherit the child. That way the child will not be entitled to any portion of the estate. The language in the last will must be watertight and follow the laws of the state exactly so there is no room for the disinheritance to be challenged.
There needs to be language that clarifies whether the child’s descendants (grandchildren) are also being disinherited. If the child is disinherited but their children are not, the descendants will inherit the child’s share as if the child had predeceased his or her parents.
Some estate planning attorneys recommend writing a letter to the child to explain the reasoning behind their disinheritance. The letter could be seen as reinforcing the parent’s intent, but it may also open old wounds and have unexpected consequences.
Your estate planning attorney will be able to clarify the steps to be taken to address an estranged child in your planning. This is a situation where it will be helpful to discuss the full details of the relationship so the correct plan can be put into place. If you would like to learn more about managing family dynamics, please visit our previous posts.
Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
