A testamentary trust is a specific type of trust that’s created as part of a last will and testament. A grantor (the creator of the trust) leaves instructions in their will for a named executor detailing how their assets are managed by a trustee and distributed to beneficiaries. The trust itself is established after the grantor’s death.
Creating a testamentary trust for minor children, relatives, or others who may inherit estate assets is most common. However, a testamentary trust can be established to manage charitable distributions as well.
In their will, a grantor can create separate trusts for each beneficiary, which split assets equally, or a family trust allowing assets to be distributed based on a beneficiary’s need.
How do testamentary trusts work?
After the grantor’s death, the probate court verifies the will is authentic before the trust can be established. A document called a letters testamentary, which provides court authorization to the will’s executor, is usually required — along with a death certificate — for the trust to be established.
Once authorized, the executor establishes the testamentary trust, and the trustee manages the deceased’s assets on behalf of the beneficiaries. Often, assets can’t be distributed to beneficiaries until predetermined conditions are met. (In many cases, it’s when young children turn a certain age.)
A testamentary trust lasts until the terms of the trust expire and the assets are distributed to the beneficiaries.
Who can be a trustee?
The grantor appoints a trustee in their last will and testament. Since the testamentary trustee is responsible for managing the trust, it should be someone who has the beneficiary’s best interest in mind. If the named trustee declines when the trust is established, the court can appoint a new one, or someone can volunteer.
Why do testamentary trusts go through probate?
Testamentary trusts are established as part of a last will and testament, and therefore must go through the probate process, which authenticates the will. This does mean that testamentary trusts entail a bit less privacy and more court involvement than other types of trusts.
Testamentary trust vs. living trust
A living trust (or inter-vivos trust) is established before a grantor’s death and managed by a trustee while the grantor is still alive. This type of trust allows the grantor more say in the execution of the trust than a testamentary trust, which is established after death.
A living trust can be revocable or irrevocable, but a testamentary trust is always a kind of irrevocable trust. It can’t be changed after the grantor’s death.
Testamentary trust example
Let’s say you’re planning your estate and have $100,000 you want to leave to your young child. You create instructions for a testamentary trust to be established after your death and choose your best friend as the testamentary trustee.
According to the trust terms you laid out, after your death, your best friend will manage the trust funds and make decisions in your child’s best interest until they reach the age of 25. At that point, the trust will terminate, and your child will receive the money.
Advantages and disadvantages of a testamentary trust
Testamentary trusts can be a helpful estate planning tool, but they may not be the right option for everyone. To help you decide, keep your financial situation and estate planning checklist in mind, and take a look at these advantages and disadvantages.
Advantages of a testamentary trust:
- Parents can distribute assets to their children in the event of their death.
- There’s no limit to the number of beneficiaries that can be named in the will.
- If the deceased leaves assets for their minor children, the assets are protected until the children are old enough to use the money responsibly.
- Assets may have more time to grow, since instructions are created while the grantor is alive but the trust is established after death.
- The trust instructions can be changed while the grantor is still alive.
- The cost to establish the trust comes out of the estate after the grantor’s death, help making it a low-cost option upfront.
Disadvantages of a testamentary trust:
- The trust must be established according to instructions left in the will. Since it can’t be established until after the grantor’s death, there’s a chance the trust may not be executed exactly as the deceased wanted — especially if information is missing from the instructions.
- You can’t avoid the probate process, which could take weeks or months. This can leave beneficiaries without needed assets for some time.
- Assets become public record during the probate process.
- Trustees must meet with the probate court yearly until the trust expires. Court fees can add up, depending on how long the trust lasts.
A testamentary trust can be a great low-cost option to ensure the protection and proper distribution of assets to beneficiaries after death. Talk with an estate planning attorney or financial advisor to see if setting up a testamentary trust would be beneficial for you and your family.
