Strings Attached – Conditional Gifts Vs Testamentary Trusts

Assets preserved
A testamentary trust helps to preserve your assets. A normal Will without a testamentary trust provision would leave assets directly to beneficiaries.

This can prevent assets from being dissipated prematurely as trustees will have the discretion to whether assets should be should or retained to generate future income for beneficiaries.
A testamentary trust might be better than an inter vivos trust if the expected estate is small as compared to potential life-insurance settlement accounts.

Enables provisions of adequate cash or liquid assets to cater for needs in carious situations such as final expenses, medical expenses before death, cost of estate administration, debts and liabilities, contingent liabilities, unsettled income tax, losses due to forced sale of assets and losses due to liquidation of business interest.

Control over funding
The ability to provide asset protection for intended beneficiaries
More control over how their loved ones will use their inheritance. Testamentary trusts are ideal if have beneficiaries who are unable to handle a lump sum benefit responsibility. This way the beneficiary’s inheritance is protected and preserved from waste and dissipation by the beneficiary
Child that has poor spending habits, can use trust as a way to ensure s/he will not squander their inheritance.

Provision for beneficiaries with particular needs, a testamentary trust allows you to provide financial security for your child with someone else who you can trust to actually control the funds.

Protection against certain types of beneficiary, (eg. spendthrift, drug addicted or other beneficiary types where the distribution of funds to the beneficiary needs to be controlled or the beneficiary’s access to the funds limited).

Provides means for assets to be assigned to minor children to be protected until the children are capable of managing these assets.
A testator is able to dictate who will be entitled to his assets as well as the extent of their entitlement.

He can appoint guardians to look after the interest of his minor children. He has the powers to create a testamentary trust for his children’s education, his elderly parents’ living expenses or the charities of his choice.

He can also give directions as to his funeral arrangements (although this is rarely done due to its impracticality).

As such distribution process may be faster as everything is set in stone.

Simplicity
Developing a testamentary trust is relatively easy to do. It can be a part of a Will, so it is easy to incorporate the trust into a will while creating the Will or as a later addition.

Maintenance costs
Although you will not pay the majority of the costs up front, there are costs that will need to consider for the sake of the beneficiaries and the trustee. Eg. the trustee may be required to regularly report the trust assets or appear in court to make regular reportings.

Handling of the trust might still involve significant legal fees, which are deducted from the principal of the estate.

Trustee
With the creation of a testamentary trust, trustee will still retain discretion in handling the assets in the event that beneficiary later becomes bankrupt or encounters unfortunate events.

Trustee is required to regularly meet with the probate court, in most jurisdictions at least annually. The trustee must prove that the trust is handles in a responsible manner. The trustee may encounter some emotional attachment and legal liability when handling the trust.

The designated trustee has the option to turn down the role. That can mean that the probate court will name someone else to be the trustee. The trustee could end up being a complete stranger in some cases. Hence, it is important to discuss plans with prospective trustees to avoid such situations.

It can also be difficult for beneficiaries to bring a dishonest trustee to account

Covers a wide scope allowing testator’s to practice testamentary freedom in fulfilling their wishes.

If a condition precedent is not satisfied, the beneficiary receives no benefit at all as intended by the testator.

Not necessary to gift assets easily to beneficiaries

Not enforceable and practically workable should conditions not be per the requirements: illegal, contrary to public policy and uncertainty – to which uncertainty may be broad.

Assets not necessarily preserved unless the condition amounts to a trust eg. donee dies.

Often doesn't work as intended when not worded well and may backfire the testator’s intentions.

Difficult to foresee all the possibilities resulting from the conditions. The decedent cannot respond to changes and it is difficult to set up conditions that the living cannot circumvent.