A Testamentary Trust is known as a “trust under will” as it allows for the distribution of an estate into a trust when the creator of the trust dies. This type of trust is created in a last will and testament and it is irrevocable upon the death of the originator. Until that point, similar to a revocable trust, you can make changes while you are alive. This is the case because a Testamentary Trust is not created until the originator dies. Updates are able to be made up until that point in time.
Testamentary trusts are like other trusts in that they specify how assets will be distributed to your beneficiaries. People can use this type of trust if they want the ability to specify when they leave assets to beneficiaries. The terms of the trust are defined within the last will and testament of the originator. The Testamentary Trust is created after the will goes into probate and trustees may be required to go to probate annually until the expiration of the trust. A Testamentary Trust expires upon beneficiaries receiving assets at the predetermined time.
How To Create A Testamentary Trust
Similar to other trusts, you need to have someone to set up the trust, someone to manage the trust, as well as someone who will receive the trusts’ assets.
Who Is Involved?
The originator of the trust is named different things, they are often called a trustor, grantor, or settlor — but they are all synonymous. The name of the person designated to manage the trust is known as a “trustee”, and this can be a family member or someone appointed by the probate court. Finally, the ones who the assets will be distributed to are known as the beneficiaries — often it is the immediate family such as children, grandchildren, nieces, nephews, etc.
Aside from the primary members mentioned above, also involved is the probate court. The probate court process is needed to ensure that the will is validated as authentic. Once the will is established as authentic, the trust can then be created. Probate also ensures that the trust is being handled correctly by the trustor.
How Is It Created?
A Testamentary Trust is created as part of a last will and testament by the trustor. There can be more than one Testamentary Trust within a will as well. The trustor has the ability to specify when and how assets will be distributed to the beneficiaries as outlined in the will.
These types of trusts usually have conditions upon which assets are distributed — for example if a young child is involved, you may have a sibling that you want to designate as trustee until the child comes of age (or whatever age is outlined in the will). Once this age is reached, the assets will be transferred to the child and the trust will be terminated.
Pros and Cons Of Testamentary Trusts
The Testamentary Trust can be useful for providing long term transfer of assets. It can be lower cost up front, with a potential for higher costs down the line. It depends upon the conditions that are outlined in the arrangement.
Pros of A Testamentary Trust
There are advantages or benefits to a Testamentary Trust that can protect both the originator of the trust as well as the beneficiaries. Some of the pros for this type of trust include:
- Trustor decides when assets can be distributed to the beneficiaries
- Assets will remain protected until the designated age provided by the details in the will
- Lower upfront costs that other types of trusts
- The trust can be funded with life insurance policy proceeds after death. The beneficiary of the policy must be the trustee. The trustee can pay out into the trust once the trustor dies
Cons of A Testamentary Trust
There are certainly downsides of a Testamentary Trust as well as the aforementioned upsides. The costs can be relatively low in the beginning. You can end up eating into the assets due to probate costs. Some of the cons for this type of trust include:
- Low up front costs, but on the back end the probate costs can be high
- Must meet at probate court annually. If the trust is set up for many years the court costs can really add up
- Creating a trust after death can create issues as well:
- Trustees are not sure how to interpret something, they are not able to ask the trustor since they are deceased
- If the trustee does not want responsibility, the court can appoint one. This may be against the trustors wishes (which they cannot contest obviously)
Final Thoughts: Start Planning Your Estate
This type of trust may not be for everyone, however, it may be the most suitable for people with families. A common reason to have a Testamentary Trust is to provide for your children in the event of your death. If you want to determine when assets shall be allocated to your children, for instance, at set age intervals — a Testamentary Trust can accomplish this.
An example would be if you die while your child is a minor, and you want to make sure that they are taken care of a certain way, you can set it up so that distributions are spread out through different ages. If you want at age 18 for them to get half of the assets so that they do not burn through them in its entirety — you can do so. Then you can set up the distributions at a later age for the remainder of the assets when you feel like it would be necessary.
No matter how you want to set this up, or what conditions you wish to outline — having a financial advisor professionally review your Testamentary Trust would most likely be in your best interest.