Testamentary Trust Explained
What is a testamentary trust?
A testamentary trust is a trust created within a will that does not come into existence until after the individual who wrote the will (the testator) passes away. This type of trust is different from a living trust because the trust does not exist during the testator’s lifetime.
What is the difference between a testamentary trust and a living revocable trust?
There are two key differences between a testamentary trust and a living revocable trust. First, as discussed above, a testamentary trust does not come into existence until after the testator passes away. A living trust, on the other hand, comes into existence when the proper documents are executed during the testator’s lifetime.
The second difference deals with whether probate proceedings are required. Generally, a testamentary trust requires probate proceedings in the local court. This trust will not exist until the probate court recognizes its existence. Conversely, a living revocable trust seeks to avoid probate. If done correctly, a living revocable trust can completely eliminate the need for probate. Probate may not be avoided despite the existence of a living revocable trust if some assets were not transferred into the trust during the testator’s lifetime.
There are other differences between testamentary trusts and living revocable trusts. Since the terms of testamentary trusts are located within the testator’s will, they are part of the public record. Living trusts, generally, are not. Testamentary trusts are usually subject to the continuing jurisdiction of the probate court, making it easy for an interested party to bring a claim against the trustee. Under a living revocable trust, an individual seeking to bring a claim against a trustee often have to file a new lawsuit in the local court. Generally, contesting the actions of a trustee under a revocable living trust will take much longer.
What are some benefits to implementing a testamentary trust?
One benefit of a testamentary trust is that it controls when and how a beneficiary will receive assets. For example, a testamentary trust may provide that the testator’s son should not receive his one million dollar inheritance until he is twenty-five. If the testator dies when his son is twenty, the testator won’t have to worry about his son spending his inheritance before an age where the testator feels his son will maturely handle the request.
The instructions governing the trust may allow the trustee to distribute money to his son before he reaches twenty-five if the money will be used for a stated purpose under the trust agreement (for example, if it is for his health, support, maintenance, or education). This ensures that his son will still get the benefits of his inheritance for a purpose that the testator would want him to use it on. Alternatively, the instructions governing the trust may allow the trustee to distribute the income from the trust (or a certain portion of the trust) to the son intermittently (monthly, quarterly, yearly ex.). This ensures that the son will enjoy a portion, but not all, of his inheritance.
The second benefit of a testamentary trust results from the ease of making changes to the terms of a will. Since the testamentary trust does not come into existence until after the testator dies, the testator does not need to re-title assets in the trust’s name during their life. Therefore, once a will creating a testamentary trust is validly amended, the testator does not need to worry about whether or not assets need to be re-titled based on their latest changes to his will.
Testamentary trusts may also protect the testator’s money from creditors and have income tax benefits. It is necessary to contact an experienced estate planning attorney to discuss how a testamentary trust may benefit you.
What are the disadvantages of a testamentary trust?
One disadvantage of establishing a testamentary trust is that the trust property must go through probate before the trust can commence. Furthermore, these trusts are usually subject to the continuing jurisdiction of the probate court. This means that the probate court retains subject matter jurisdiction over the proceedings of the trust, and the trust is subject to continuous court supervision. Probate courts often supervise the trust by requiring periodic accountings on the operation of the trust. Therefore, the second disadvantage of these trusts is that the trustee’s (and sometimes the attorney’s) fees are usually much higher than under other types of trust agreements.
Another disadvantage of a testamentary trust is that the terms of the trust are a matter of public record since they are placed in the body of the will. People may find this disadvantageous because it becomes a matter of public record when money is going to be distributed to a beneficiary under the trust. For example, an individual searching the public record may find out that Johnny, a student at a local college, is going to inherit one million dollars once he successfully graduates college under the terms of his grandmother’s trust. Families often wish to keep this type of information private.
Furthermore, testamentary trusts may be burdensome if the testator becomes incapacitated. Since these trusts do not come into existence until after the testator passes, no one will be managing the assets of the trust when the testator becomes incapacitated. The terms of the trust are limited to how the money should be managed when the testator dies, and provide no guidance to how the money should be managed when the testator is incapacitated and unable to make proper financial decisions for themselves.
What is the role of a trustee under a testamentary trust?
The role of a trustee under a testamentary trust is to manage the assets in accordance with the testator’s wishes for the benefit of the beneficiary. Testators should choose their trustee’s carefully.