A trust is a legal device allowing a property owner to make transfers of property, and to have those assets managed on behalf of someone. A testamentary trust is inserted by a testator (a person who creates a will) into their will. The terms of the trust only come into effect when the testator dies. The trust names a trustee, who distributes and manages trust assets.
For a testamentary trust to be inserted into a will, the individual seeking the trust to be added to the will must first have a validly executed will.
A testamentary trust must be validly created. The requirements for valid creation of a testamentary trust are:
- A settlor: The settlor is the creator of the trust;
- Delivery by the settlor of legal title to trust property: A person with legal title to property has the right to transfer the property to another;
- A trustee: The trustee holds the legal title. The settlor funds the trust by delivering property to the trustee. The trustee then places the property into the trust;
- A beneficiary: The beneficiary is the person to whom the settlor distributes trust property. The trustee holds the legal title for the beneficiary’s benefit;
- Intent: The settlor must have intent to create a trust for any lawful purpose; and
- Valid execution of the trust document: To be validly executed, the trust must be signed by the settlor and trustee in writing
A testamentary trust is either contained in a will, or is incorporated by reference into the will. “Incorporation by reference” means the will identifies the trust, by name, as being part of the will. A testamentary trust is irrevocable. This means it may not be revoked during the settlor’s lifetime.
The testamentary trust in the will names the executor of the estate and provides for the appointment of a trustee. When the testator (the person who created the will) dies, the will goes through the probate process. Through the probate process, the authenticity of the will is established. DIstributions are given to will beneficiaries. Once this is done, the testamentary trust begins to operate. The first step is the executor placing trust property into the testamentary trust.
Then, the trustee named in the trust manages the trust property. This may consist of managing assets for trust beneficiaries until the trust beneficiaries reach a certain age. For example, a testamentary trust may require the trustee to manage assets for a beneficiary who may not receive those assets outright until they turn 21 years old. Once the beneficiary turns 21, the beneficiary takes ownership of the assets. Management may also consist of managing assets for a disabled or incapacitated person. This type of management continues for as long as the trust terms permit it to.
Testamentary trusts do not operate in the same manner as a will. A will beneficiary is typically given property without any conditions. A settlor of a trust, however, may wish for a person to receive property, but only upon certain conditions. These can include the beneficiary’s attaining a certain age or completion of an educational degree. The trustee of a testamentary trust ensures trust assets are distributed only when the condition is met.
Testamentary trusts are used for a number of reasons. These include:
- Reducing or avoiding estate tax liability;
- Ensuring that assets of the deceased person are professionally managed by a trustee;
- Trustee management may be preferred when the beneficiaries are children. Concerns that a child may “overspend” their inheritance can be avoided by a trustee’s managing the assets until the child turns a certain age. For example, a testamentary trust may provide that the child beneficiary’s assets be allotted for the child’s schooling, and not for anything else, until the child turns 25. Once the child turns 25, the trust may provide that the remaining assets be given to the beneficiary outright. Using a professional trustee can prevent children from using trust assets other than in accordance with the settlor’s wishes; and
- A testamentary trust allows a trustee to manage the distribution of assets that the settlor intended to go to charity. Use of the testamentary trust ensures the charity receives assets in accordance with the settlor’s wishes.
Trustees have a fiduciary duty with respect to the trust. A fiduciary duty is a duty of loyalty. This duty of loyalty requires the trustee act in good faith when managing trust assets. The duty of loyalty also prohibits the trustee from taking trust property for their own personal use. Beneficiaries can sue a trustee for violating this duty.
If you seek to create or modify a testamentary trust, you should contact a trust lawyer. This lawyer can assist you with drafting a trust that expresses your wishes. The lawyer can represent you in court if there is a dispute over the trust.