What is a Testamentary Trust?

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A testamentary trust is a trust that comes into being upon the death of the individual creating the trust. A trust is an estate planning tool that is used in order to avoid probate as well as provide a benefit for a specific beneficiary and/or group of beneficiaries. The requirements to form a trust vary by state.

A testamentary trust is usually enacted by instructions contained in an individual’s will documents. A will can contain more than one testamentary trust. It may address any portion or all of the estate within the trust document.

A testamentary trust is enacted with the individual, also known as the testator, grants property to a beneficiary in their will document. The will document will state that the property is to be transferred in trust rather than stating the property will be distributed directly to the beneficiary.

When a trust is created in a will, it goes into effect immediately. A testamentary trust, however, is not actually created until the death of the testator.

The property included in the testamentary trust will first be transferred to a trustee to hold the property until the time comes to transfer the property to the beneficiary. This can occur in many ways, such as on a specific date and/or after specific circumstances have occurred. The testator specific all of the specifics of the testamentary trust. For example, the will may state that “the beneficiary shall receive the funds from the trustee once they graduate from college.”

What are the Requirements for a Trust?

The requirements for creating a trust vary by state, but usually share the following necessary elements:

  • Settlor capacity;
  • Identifiable property;
  • An identifiable beneficiary; and
  • A proper trust purpose.

The settlor is the individual who established the trust. They can also be known as the:

  • Donor;
  • Grantor;
  • Trustor; and/or
  • Trustmaker.

In order for the trust to be valid, the settlor must have the proper mental capacity to create the trust. This means they must have intended to create a trust with any necessary formalities of the state, including being in writing.

The trust must contain specifically identifiable property, or trust res. There must be enough detail or enough of a description of the property to know exactly what property is to be held in the trust.

Additionally, the beneficiary and/or group of beneficiaries to the trust must be sufficiently identifiable. They must be determined at the time the trust is created. It is important to note that for a charitable trust creation, this is often not a requirement.

The trust must have a proper purpose when formed, meaning it cannot be created for an illegal reason. For example an individual cannot create a spendthrift trust in order to hold property in their own name for their own benefit simply to keep creditors from reaching those assets. A court will usually hold that such trusts are invalid.

In general, all trusts in the United States are presumed to be irrevocable, unless the instrument states otherwise. However, there are some states, such as Texas, Oklahoma, and California, where trusts are presumed to be revocable, unless otherwise stated in the instrument.

What is the Difference Between a Testamentary Trust and a Non-Testamentary Trust?

A non-testamentary trust, also known as a living trust, goes into effect when the grantor signs the trust, has the trust document notified, and actually transfers the property into the trust. Non-testamentary trusts are known as living trusts because they go into effect during the grantor’s lifetime. In addition, non-testamentary trusts can be revocable and/or irrevocable.

In contrast, a testamentary trust does not take effect during the grantor’s lifetime, but is created upon the death of the trust maker, as noted above. Prior to the grantor’s death, the trust is revocable and the grantor is free to make any changes to the trust. However, at the time of the grantor’s death, the testamentary trust becomes irrevocable.

Why use a Testamentary Trust?

There are many reasons to use a testamentary trust rather than a simple transfer through a will, including:

  • Protection of assets;
  • Protection from creditors;
  • Tax advantages; and/or
  • Avoiding probate.

One common reason for the use of a testamentary trust is the protection of assets from a beneficiary who may be young and inexperienced and may overspend or waste the trust assets. Often, a testator will indicate the property should be held in trust until the beneficiary reaches a certain age, such as the age of majority.

Another reason for the use of a testamentary trust is to protect a beneficiary’s assets from creditors. Funds and property placed in the trust can be kept from creditors should the beneficiary go bankrupt or insolvent.

There may also be tax advantages to a testamentary trust. The taxable income generated from the trust may be provided to the beneficiary in a tax effective way. These benefits vary by state and often depend on the overall property of the testator and the beneficiary.

Testamentary trusts can also assist in avoiding the probate process. It also helps ensure the testator’s property is distributed in accordance with the testator’s wishes.

Another benefit that is associated with trusts is greater accountability for an individual’s own funds, as well as better personal management of their finances. In other words, using a trust can make financial transactions more organized and it also establishes a record of the transactions.

How is a Trust Different from a Will?

A trust and a will are very different. In a trust, the assets and/or property are first transferred to a trustee. The trustee then distributes the property to the beneficiary according to the instructions provided by the trust creator. Not all trusts created are testamentary trusts. Some trusts are created during the testator’s lifetime, such as living trusts.

A will is an estate planning document that allows an individual to provide instructions on how their property should be distributed upon their death. Property distributed in a will can be real property, money, and/or personal property. Pursuant to a will, property generally goes directly to a beneficiary. This is generally handled by the will administrator due to the testator being deceased, but the property still passes directly.

Who can be a Trustee of a Testamentary Trust?

The trustee of a testamentary trust can be any individual the grantor desires. This can include the executor of the will, the individual’s spouse, and/or their children. The trustee of the testamentary trust will have effective control of the property. Therefore, the testator should name a trustee whom they know and trust to act in the best interest of the beneficiaries of the estate.

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

Yes, it is important to have the help of an experienced trust lawyer when creating a testamentary trust. These types of trust can require foresight and planning in order to ensure the distributions will occur as you desire.

An attorney can assist in drafting the testamentary trust and ensuring your property is distributed properly. Additionally, the lawyer can ensure the trust is valid under local state laws. A lawyer can also represent you during any court proceedings, such as a trust dispute, if necessary.

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