The Use of Testamentary Trusts to Carry Out Your Wishes

PART II of Effective Estate Planning for Married Couples

This article is the second installment in a series geared toward addressing Effective Estate Planning for Married Couples. At Carver Darden, we frequently draft wills for clients who find themselves in the following circumstances. Mary and Jack are married and live with their two children, Steven and Miles, in a leased condominium overlooking the New Orleans skyline. Steven is an eight-year-old second grader while Miles is a seven-year-old first grader. Mary and Jack are in the middle of their careers as petroleum engineers and have accumulated sizable balances in their retirement plans. After Steven and Miles were born, Mary and Jack also purchased multi-million dollar life insurance policies in the event either of them would experience an early death. Mary and Jack designated each other as the primary beneficiaries and Steven and Miles as the contingent beneficiaries of the life insurance policies and retirement plans that they acquired.  

As previously covered in our first estate planning installment, probate assets such as real estate, bank accounts, stocks, bonds and mutual funds will pass to legatees named in a will. On the other hand, life insurance, annuities, and retirement plans are non-probate assets that pass outside of a will to designated beneficiaries. Nevertheless, in the event Mary and Jack die together or experience individual and untimely deaths, they can still control how their life insurance benefits and retirement plan funds will be used for the benefit of Steven and Miles by means of a trust.  Simply stated, a trust is a fiduciary arrangement whereby property is managed by a person called a “trustee” for the benefit of one or more persons known as “beneficiaries”. By placing assets in a trust, one is able to preserve his or her principal assets such as cash, investments, or income-generating property for the benefit of the beneficiaries of the trust.

Under Louisiana law, you can create a trust in your will that will come into existence upon your death. These trusts are commonly known as Testamentary Trusts. Testamentary Trusts are invaluable tools that enable people to fully achieve their estate planning goals, even with non-probate assets. In our example, both Mary and Jack can draft a will establishing a Testamentary Trust that is the contingent beneficiary of the death benefits payable under their life insurance policies and retirement plans for the benefit of their children, Steven and Miles. The Testamentary Trusts will name the trustees and successor trustees who Mary and Jack believe are the best ones to manage the trust assets for Steven and Miles over a maximum term.

The Testamentary Trusts will also provide the trustees with Mary and Jack’s instructions regarding the management and distribution of trust assets. They may cloak the trustees with the authority to withhold distributions if the chosen trustees determine that either child has demonstrated financial instability, is suffering from a physical/mental condition, or is addicted to a substance that might adversely affect the management and conservation of property.  Mary and Jack may also provide for early distributions of trust funds for tuition expenses should Steven or Miles attend college and delay or restrict distributions for other expenses until Steven and Miles reach certain hallmark ages. By utilizing Testamentary Trusts, Mary and Jack have prevented Steven and Miles from obtaining control of the substantial sums of money they would receive at the age of majority, eighteen years old (18), and have further achieved the prudent management of the trust assets held for the benefit of their children.

The planning possibilities with Testamentary Trusts are essentially endless. Testamentary Trusts can provide protection of non-probate assets designated for the benefit of grandchildren.  Testamentary Trusts can also be designed to withhold distributions to any beneficiary not advancing toward a college degree or gainful employment.  For disability cases, a Testamentary Trust can be structured as a Special Needs Trust and provide for distributions in a manner that will minimize the risk of loss of a beneficiary’s vitally needed government assistance.  Your author, however, leaves you with one parting note. A person wishing to utilize a Testamentary Trust for non-probate assets must execute the change of beneficiary forms with the appropriate insurance companies and retirement plan administrators to guarantee the recognition of the Testamentary Trust as the contingent beneficiary of the death benefits generated by non-probate assets.   

David Landry is an experienced estate planning attorney who also practices in the fields of oil and gas law, banking law, commercial and general litigation, commercial transactions, and corporate law. If you are interested in reviewing your current estate plan or have any other questions relating to the fields in which David practices, please contact him at the address below.

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