What Is a Testamentary Trust?

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What Is a Testamentary Trust?

A testamentary trust is a type of trust that is enacted upon the death of the person creating the trust. It is generally enacted through instructions contained in the person’s will documents. A will may contain more than one testamentary trust, and may address all or any portion of the estate within the trust document. The way this works is that the person (the testator) grants property to a beneficiary in their will document. However, the will document will state that the property is to be transferred in trust rather than directly to the beneficiary. When a trust is included in a will, the will goes into effect immediately, but the testamentary trust is not actually created until the death of the testator or the will maker.

This means that the property will first be transferred to a trustee, who will hold the property until the appointed time comes for transferring the property to the beneficiary. This can happen in many ways, such as on a certain date or after certain circumstances have happened. The testator specifies all this. For instance, they may state, "the beneficiary will receive the property from the trustee once they complete college".

What Is the Difference Between Testamentary Trust and Non-Testamentary Trusts?

Non-testamentary trust or living trusts take effect when the grantor signs the trust, has it notarized, and actually transfers the property into the trust. Non-testamentary trusts are called living trusts because they go into effect during the grantors lifetime. Also, non-testamentary trusts can also be revocable or irrevocable.

In contrast, a testamentary trust does not take into effect during the grantors lifetime, but until the death of the trust maker. At the time of the trust maker’s death, the testamentary trust will be irrevocable. Before the grantor’s death, the testamentary trust is revocable and the grantor is free to make any changes to the trust.

Why Use a Testamentary Trust?

There are many reasons why a testamentary trust would be used rather than a simple transfer through a will.

     1.  Protection of Assets: One main reason is to prevent overspending or waste by a beneficiary who is young and inexperienced. The testator may wish that the property be held in trust until the beneficiary reaches a certain age (such as the age of majority or age 18).

     2.  Creditor Protection: A trust can also protect beneficiaries’ assets from creditors and protects the property placed in the trust from the hands of creditors if the beneficiary were to go bankrupt or insolvent.

     3.  Tax Advantages: Taxable income generated by the trust can be allocated to the beneficiaries of the trust in a tax effective way. These types of benefits can vary by state and usually depend on the overall property of the testator and the beneficiary

     4.   Avoid Probate:  Testamentary trusts can often help avoid the probate process, which can result in property distributions that the testator might not have agreed with.

How Is a Trust Different from a Will?

There are many differences between a trust and a will. With a trust, the asset or property is first transferred to a trustee, who will then distribute the property to the beneficiary according to the instructions of the trust creator.

With a will, the property usually goes directly to the beneficiary (although this is handled by the will administrator since the person is already deceased). Not all trusts are testamentary trusts. Other types of trusts are created while the person is still alive (as in a living trust).

Who Can Be a Trustee of a Testamentary Trust?

Anyone that the grantor desires can be the trustee of a testamentary trust including the executors of the will, their spouse, or their children. The trustee will have effective control of the Trust, so the Trustee should be a person who the Will maker knows and trusts and who will act in the best interest of those who will receive the main benefit of the estate. 

Do I Need a Lawyer for Help with a Testamentary Trust?

Testamentary trusts often require much foresight and planning in order to ensure that the distributions will be satisfactory. You may wish to hire an estate-planning lawyer if you need help drafting or reviewing a testamentary trust document. Your attorney can assist you with the process and can go over the terms to ensure that your trust will be valid under state laws. Also, your lawyer can provide representation in the event of a trust or will dispute.

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Last Modified: 03-31-2016 11:21 AM PDT

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