What is a Testamentary Trust?
A testamentary trust is unique in that while most trusts are created during one’s lifetime, a testamentary trust comes into effect only after the grantor has passed. These trusts are created through the instructions included in the decedent’s last will and testament.
Instructions can be provided for funds such as a life insurance policy, and creating the testamentary trust allows you to remain in control of the funds even after your death until the beneficiary reaches the milestone you stipulated.
There are three main people in a testamentary trust: the grantor, the trustee, and the beneficiaries. The grantor is the person creating the trust, the trustee is the party tasked with managing the trust’s funds, and the beneficiaries receive the inheritance.
Two Types of Testamentary Trusts
There are two main types of testamentary trusts: an individual trust for children and a family trust.
Individual trusts for children allow for more independent specifications based on each child in the family.
For example, suppose you have one child who has established that they are financially stable and make sound economic decisions. In that case, you may stipulate that the milestone they need to reach is to finish college or purchase their first home, while another child may be quite young and not understand finances yet, so you set their milestone at a certain age.
A family testamentary trust is created for families to ensure that the funds inherited are used for the betterment of the family rather than one individual. Assets within the trust are also generally protected from creditors and allow for financial planning abilities for multiple generations.
A significant disadvantage that some may find with the family testamentary trust is that it can lead to disputes amongst family members as to what is best for the family. Another drawback is that the costs associated with establishing and managing the trust may be higher than other trusts.
What is a Primary Reason to Establish a Testamentary Trust?
One of the primary uses for establishing a testamentary trust is to protect intended funds until a beneficiary is ready and capable of utilizing them efficiently and using good judgment. Most testamentary trusts stipulate an age, so the decedent can ensure the beneficiary is ready to handle the inheritance. Most will define the age of 18, upon finishing college, or other milestones that push the inheritance out until the beneficiary can manage the funds.
For example, a will specifies how a testamentary trust is to name a grandchild as a beneficiary, but that grandchild is still young. Upon the death and creation of the testamentary trust, the child is still under the age of 18. The trust holds the funds from the beneficiary until the specified age, rather than dispersing it while the child may be too young to adequately understand how to support themselves.
Until the specified age or milestone of the beneficiary is reached, the trustee is tasked with managing the funds by investing the assets or spending them according to the decedent’s stipulations and what’s best for the funds.
Does a Testamentary Trust Help Avoid the Probate Process?
One of the main advantages most find appealing with trusts is avoiding part or all of the probate process. The probate process is often lengthy and can be costly, and the assets are tied up during this time, which means that beneficiaries don’t have direct access to them until the process has been completed.
As discussed above, a testamentary trust is different because it is not created until after death, and the probate process is necessary for this to occur. The probate process must oversee assets within the testamentary trust, and until they’re approved and created, access is limited to none.
The probate process is entrusted to ensure that the grantor’s wishes are accurately carried out and that the trustee effectively manages the assets according to the stipulations made by the grantor.
Why is a Trustee Such a Crucial Role in a Testamentary Trust?
The probate process and the trustee manage the entirety of the assets within the testamentary trust. A trustee is vital to all trusts and must be someone you can explicitly trust to manage the funds as you wish.
This aspect is especially important with a testamentary trust as the creation doesn’t occur until after your death, so communication must be explicit and black and white with the trustee in advance. If there is a gray area, it can lead to frustrations, extended time and costs that may occur in probate while the details are ironed out, and other issues.
Consider these details when creating your testamentary trust to ensure your wishes are followed and there is no miscommunication after your death.
A Comprehensive Estate Plan is Tailored To the Specific Needs of Your Family
Each family is different; therefore, not all estate planning tools will make sense to you and your needs. What may have worked well for your siblings or co-workers may not be the best fit for your family. The great news is that you can choose from many tools and resources to customize a comprehensive plan that fits your exact needs, no matter how diversified they are.
Our team has been working with families for years to ensure that their wishes are communicated and planned for so they can continue to provide for their loved ones for years to come, even after they are gone.
Contact our office today at (319) 379-2007 for your initial case evaluation.