A testamentary trust is a legal tool created in a person’s Last Will and Testament to specify how one’s assets will be distributed to specific beneficiaries. Contrary to a living trust, it comes into effect after one’s death.
A testamentary trust involves three main parties:
- Settler (also known as a grantor, donor, trust maker) – the person creating the trust.
- Trustee – the person who manages the assets before they are subsequently distributed to the beneficiary.
- Beneficiary – the person who will come into possession of the assets once the trust comes into effect.
Benefits of a testamentary trust
A testamentary trust is an essential tool for those who want to protect their estate and assets and distribute them according to their wishes.
This kind of trust has several benefits, among which:
- Tax benefits – it does not require the beneficiary to pay succession taxes. For instance, if the trustee and the heir happen to be the same person and inherit assets in Italy, they are not required to pay succession taxes on said assets.
- No transfer fees – usually, a testamentary trust does not require the parties involved to pay any fees during the transfer of assets from the settler to the trustee.
- Property/asset protection – this trust grants the protection of the grantor’s assets after death.
Let’s examine this last point in more detail below.
A mock case on the protection of assets in Italy
Let’s simulate a case to understand the essential role of a testamentary trust in one’s distribution of properties and assets after death.
Michael and Mary are married with two children and joint properties and assets. They also share a home in Italy.
- With a standard will, Mary (being Michael’s wife) owns everything – including the Italian house. However, if Mary remarries and leaves a new will, she can exclude from it the children from her previous marriage. In this case, the entire estate could go to her new spouse if she dies or goes through a divorce. In this case, Michael and Mary’s children might not inherit anything.
- With a testamentary trust, Michael may leave 50% of assets to Mary. The other 50% can be protected by the trust. Michael could decide to put the Italian house in the testamentary trust, ensuring tax benefits and protection of assets at the same time. In this case, if Mary remarries and dies, only 50% might pass to the new spouse. Michael and Mary’s children will be sure to inherit at least 50% of the assets and properties.