What is a Testamentary Trust?

What is a Testamentary Trust?

What is a Testamentary Trust?

A testamentary trust is a trust that is created as part of your Will, and that does not take effect until your death. It's most often used by people who plan to leave large sums of money, such as life insurance benefits, to their minor children or to disabled beneficiaries. To create a testamentary trust, you designate funds to be managed by a trustee, you name a trustee, and you name the beneficiaries who will receive the funds. You also specify instructions for the trustee to follow in managing the funds. For example, you can specify that the money be used for living expenses, medical care, and education, or you can leave the management of the funds completely up to the discretion of the trustee. You'll also specify when the trust is to end and the funds are to be disbursed to the beneficiaries.

Testamentary trusts can be cumbersome to manage, because the trustee is subject to the oversight of the probate court. The trustee will need to periodically report to the court, and will most likely need to seek legal advice in doing so. This, in turn, means legal fees, which are paid for from the money in the trust.

An alternative to a testamentary trust may be a revocable living trust, which is a trust you establish and which goes into effect while you're alive. In order to establish a revocable living trust, you sign a trust agreement, identifying a trustee and beneficiaries. You then transfer property to the trust. Generally, you serve as your own trustee during your lifetime, and then you identify a successor trustee who will take over upon your death. The successor trustee will then follow your instructions in managing the trust on behalf of your beneficiaries.

If a revocable living trust is properly funded, meaning that all of your property has been transferred into the trust before your death, then there is no need for probate and your successor trustee can function without court oversight.

An estate planning attorney can further explain the advantages and disadvantages to each of these types of trusts, and help you determine whether you need a trust as part of your estate plan.

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