A testamentary trust is a kind of trust that comes into effect following a person’s death. This is because a testamentary trust is established according to the instructions that are included in a last will and testament.
Trusts are most often put into place during an individual’s lifetime. They can be used to move assets from an estate into a trust to avoid probate or to lower estate taxes. A testamentary trust is most often used to make distributing an inheritance easier. The individual responsible for the creation of the trust, through their last will and testament, is already deceased. However, a testamentary trust is most helpful in assisting in distributing assets to beneficiaries.
To learn more about testamentary trusts and how they function, we will examine how they work in action, what is required to start a testamentary trust, and the pros and cons associated with them. This should give you a good idea of whether or not a testamentary trust could be a useful part of your wealth management strategy.
How Does a Testamentary Trust Work?
Unlike many other kinds of trusts that are put into effect during an individual’s lifetime, a testamentary trust only comes into effect following their passing. As such, a testamentary trust works quite a bit differently than most trusts.
All trusts are created through a trust document. This is a document that sets out the rules of the trust. There are elements of the trust document that must be included to create a functioning trust legally. Still, the majority of what is in a trust document is focused on ensuring that the trust is used effectively based on your unique circumstances.
With a testamentary trust, the trust document is included as a part of the last will and testament. This means that the document does not go into effect until the individual has passed away. Since the grantor of the trust has already passed, any responsibility for managing the trust falls to the executor. It is their responsibility to act in accordance with the wishes of the trust, as well as the will as a whole.
A testamentary trust may be used to help promote growth in your loved ones. For example, you may want your child to inherit a large sum of money. But because your child has shown themselves to be a bad decision-maker when it comes to money, you naturally are worried that they’ll just blow through their inheritance. The testamentary trust could be written in such a way as to require your child to reach a certain age before they receive their money. Alternatively, you may decide that the funds should be used for theirs education and so include language that specifies that the funds can be used for educational purposes but not for partying or vacationing.
What is Required to Make a Testamentary Trust?
A testamentary trust typically requires three individuals or parties. The first is the grantor, which is the individual who included the testamentary trust document as part of their last will and testament. Then there is the beneficiary, typically a family member or even a friend, that is to receive some kind of inheritance from the testamentary trust. The third figure is vitally important. A trustee is appointed by the trust document in order to manage the trust’s assets.
A testamentary trust cannot be started prior to the grantor’s passing. However, a testamentary trust doesn’t immediately go into effect upon their passing, either. The trust must first go through the probate process in order to authenticate the will. During this process, an executor will be named.
The executor is then responsible for moving forward with the testamentary trust. While the executor is necessary for getting the trust stated, the trust document may still name a different trustee to maintain the trust.
A testamentary trust can stay in effect for quite some time. It is typical for the trust document to clearly state an event that would trigger the closing of the trust. For example, it may be designed to expire when the beneficiary reaches the age of 18 or 21.
What are the Pros and Cons of a Testamentary Trust?
As with all things, there are both pros and cons to using a testamentary trust.
One advantage of a testamentary trust is that it can allow you to better look out for your minor children if you pass away early. You can add a testamentary trust to your last will and testament to ensure that a trust is created to help offset any difficulties your children may face. It can be designed to stay in effect until they reach a certain age; that way, if you pass away unexpectedly while they are young, then they are taken care of. But if you pass away after they are of age, then the testamentary trust won’t need to be put into effect following your passing.
A major plus is that you could modify the trust document prior to it going into effect. Since it doesn’t go into effect until you pass, you could modify it at any point. For example, instead of getting rid of the testamentary trust document after your children come of age, you could modify it instead.
Yet a disadvantage of a testamentary trust is that you can’t avoid probate if you include one in your last will and testament. Trusts are often used to avoid probate, or at least to minimize it, but a testamentary trust requires the will to pass through probate. As such, it may be considered a disadvantage that going through probate results in a public record.
Is a Testamentary Trust Right for Me?
If you are looking for ways to improve your wealth management, then a testamentary trust may be a good fit for you. The best way to figure out for sure is to speak with an experienced estate planning attorney, as they’ll be able to take a look at your situation and provide you with advice tailored to your unique needs.