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3 things to know about testamentary trusts

Establishing a trust is a useful step for preserving assets for the future.

Testamentary trusts are an important part of the estate planning process and they can provide a number of benefits for those who are thinking about the future of their relatives.

However, these arrangements are also an area that is poorly understood by the public. To help, here are three common questions people have about testamentary trusts:

What is a testamentary trust?

A testamentary trust is a legal arrangement created with a share of a person's assets once they pass away. The assets are then held in a separate legal entity and administered by a trustee or trustees. The proceeds from these assets are then shared by the beneficiaries of the trust. 

The advantage of this arrangement is that it separates the ownership and management of a group of assets from those who would enjoy the profits, ensuring that the assets are protected for years to come.

Why do people choose a testamentary trust?

There are a number of reasons for people to choose a testamentary trust. Among the main reasons for taking this option is to provide assets for their children, especially if one of their children has a disability or requires ongoing financial support, for example.

People also choose this option in order to protect assets from any changes in the situation of the recipients. In the event that one of the beneficiaries is forced to declare bankruptcy or might squander an asset if they were given direct control, a trust can keep these assets separate.

What are the risks of a testamentary trust? 

Among the main risks that come with establishing a testamentary trust come from potential changes in the situation of your beneficiaries. Divorces and other breakdowns in relationships among beneficiaries can complicate the management of an estate.

At the same time, there is a risk that a testamentary trust will be subject to a legal challenge in Court. If an individual can successfully contests your will, for example, this may be paid out of the assets of a trust.

If you would like assistance with your estate planning or establishing an testamentary trust, make sure you discuss this option with a wills and estates lawyer.