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Testamentary Trust

A testamentary trust is a type of trust that is created in someone's last will and testament. This trust is used to manage and distribute a person's assets after they die. When the person with the testamentary trust in their will dies, the trust becomes irrevocable and is managed by a trustee until it is terminated. Testamentary trusts can be used for a variety of reasons, such as distributing assets to a beneficiary at a later date or in phases. However, these trusts require the will to go through probate before they can be created and may also have ongoing fees associated with them. There are other types of trusts that may have similar benefits and fewer disadvantages.

A testamentary trust is a type of trust that is created in a person’s will. Unlike other trusts that are typically established while the person is still alive, a testamentary trust is only created upon the person’s death, when their will is executed. This type of trust outlines how the deceased’s estate should be distributed.

Once a testamentary trust is created, the trustor (creator) can amend the trust until their death. The terms of the trust are specified in the will of the trustor. The trust becomes irrevocable upon their death – which is natural since a dead person can’t amend a trust. One (arguably negative) difference about testamentary trusts is that the will must go through probate prior to the trust’s creation.

People use testamentary trusts for a variety of reasons. One common reason is if a trustor wants their beneficiary to receive their assets (under the will) at a later date. If the trustor dies before the event (or later date), then the trust is created, lasting until the beneficiary receives the assets. The trust is then terminated.

But what happens between the trustor’s death and the termination of the trust? The assets involves are handles by a trustee. Imagine that a parent wants their teenager to receive their inheritance in phases – 50% when they are 25 and 50% when they are thirty. The trustee would then manage these assets until they are given to the beneficiary, and the trust would terminate when the beneficiary is thirty.

Since the will goes through probate, the probate court is implicated in a testamentary trust. First, the probate court must ensure the will is authentic and valid. Afterwards, the probate court makes sure the trustee is acting appropriately through the period of the trust. In some cases, the trustee may have to make an annual report to the probate court.

The primary benefit of a testamentary trust is that the deceased can control the flow of assets from beyond the grave – making sure their eighteen year old child doesn’t blow their inheritance by purchasing shares of Gamestock stock (GME). Another benefit of a testamentary trust is that it can be funded with proceeds from life insurance. If the trustor names the trust as a beneficiary of the policy, it should be directed to the trust.

Testamentary trusts aren’t without downsides. While the immediate fees may be cheap, the accumulating probate fees may cut into the assets of the trust. Another issue with a testamentary trust is that there is no clarification available (since the trustor is dead).

How to Create a Testamentary Trust

Upon the settlor’s death, the will goes through the probate process. Once this is complete, the trust is created and funds can begin to be disbursed. Many testamentary trusts include provisions specifying when some or all of the beneficiaries receive their trust allocations (e.g., at age 18). If this is the case, the trustee must go to probate court annually until the conditions are met to state that the trust is being handled in accordance with the will.

While a testamentary trust has low upfront costs, the fees from probate court can add up. The trustee needs to meet with the probate court annually until the beneficiary receives the assets. If the trust endures for many years, the court fees can eat up a significant chunk of money. Finally, the court may appoint a trustee which the trustor wouldn’t approve of – but they cannot contest this from the grave.

Testamentary trusts are one way to control your assets after death, but there are other types of trusts with similar benefits and less disadvantages. That doesn’t mean that you should avoid a testamentary trust altogether – as it’s better than nothing! For personalized legal advice regarding estate planning and testamentary trusts, contact a knowledgeable estate planning attorney in your state.