Providing for Family and Friends

Testamentary trusts are simply arrangements for loved ones established with language in your estate plan document (will or living trust). Upon your demise, the trust is initiated as set forth in your estate plan document. Testamentary charitable remainder trusts are often used to provide income to a donor's survivors. If so, the trust principal would pass to the U of I after the income recipient's lifetime, or after a term of years, as determined by the donor ahead of time. Multiple beneficiaries, and even multiple generations, in most cases, can benefit from such an arrangement. Your estate receives a valuable tax deduction since the trust assets ultimately pass to the U of I after your beneficiary(ies) is provided for.

A testamentary trust can also be used to delay an inheritance, or provide "periodic inheritances" to your heirs. In this case, upon your demise, a charitable lead trust is initiated and its income is paid to the U of I for the length of time you designate, which can be a term of years, or until a child or grandchild reaches a certain age, for example. At the end of the term, the trust distributes its balance to your heir(s). This strategy is extremely popular for grandparents leaving an inheritance to grandchildren. The idea of providing it to them later in life when they are able to use it wisely is very appealing to most grandparents. Your estate also receives a valuable tax deduction for the income that will go to the U of I, and your heirs receive any growth of the trust assets without any additional gift or estate taxation. For example, if the lead trust pays the U of I 5 percent each year—and the trust achieves an investment return of 8 percent—the additional 3 percent annually would compound and accumulate—within the trust—to be distributed to your heirs when the trust terminates. If appreciated assets are used, such as stocks, your beneficiaries also get a "step up" in cost-basis at your demise.

The primary attraction of testamentary trusts is the ability to achieve an added dimension to the financial security you provide to loved ones, while also fulfilling your desire to create a lasting legacy which will impact the lives of others. Many donors believe that providing a flow of lifetime income, for example, actually provides more "security" than a one-time lump sum inheritance which may not last. The same has been said about delayed or periodic inheritances as well. The ability to determine the ultimate recipient of your estate is also ranked very high among the benefits that testamentary trusts provide. This is especially true when a donor's beneficiaries have no heirs of their own, such as an unmarried child, or when a donor's beneficiaries are of a similar age, such as a sibling, or a spouse in a second marriage. In these cases, most donors wish to avoid their estate simply becoming part of another's estate in a matter of a few years.

The ability to address various family needs and/or concerns, while giving something back to organizations that have played an important role in a donor's life, accounts for the increased use and popularity of testamentary trusts. The process of instituting such a plan is really quite simple. If this type of planning interests you, the Foundation's Gift Planning Advisors stand ready to assist you, from the conceptual stage, through administration of your gift plan, if needed.

The U of I Foundation gift planning staff is pleased to answer your questions and offer assistance at any time. Please contact the Foundation to learn more.