By, Shirley Farmer, Attorney at Law
The information provided in this article is intended to give a general overview of the topic and is not intended as legal advice. For information specific to your situation, please talk with your estate planning professional.
Trust Article #10, TESTAMENTARY TRUST – The Less Talked About
In previous articles we have looked at two common forms of trusts, the revocable trust (also called a “Living” trust) and the irrevocable trusts, but there is yet another form of trust frequently used in estate planning … the testamentary trust. A testamentary trust is created by language included in a Will, and you can choose to include all of your assets or just a portion of your estate in the trust. For example, you can choose to leave certain assets to individuals specified in your Will, but then also specify assets, or just whatever is left over after the specific gifts, to be held in trust after you die. A single Will can also create more than one testamentary trust if the person making the Will so desires.
A testamentary trust is often used when a person wants to leave assets to a beneficiary but does not want the beneficiary to have full access to or use of the assets immediately or without some oversight. This is common when the beneficiary is a minor child or perhaps an adult with a disability, and it is important to have a responsible adult assigned to manage the assets for the beneficiary. Unlike with a revocable trust where you transfer assets into the trust while you are still alive, when you create a testamentary trust the assets do not become property of the trust until you die, so you do not have to worry about “funding” the trust or any restriction on buying and selling assets during your lifetime.
Many of the basic provisions of a testamentary trust are the same as those in a revocable trust, such as naming a trustee, designating beneficiaries, setting the guidelines for use of the trust assets, and establishing when the trust is to end. Of primary importance in creating the trust is the choice of who shall serve as the trustee. This is a very important decision in creating any trust, and even more so for a testamentary trust, as the person creating the trust will not be alive to have input in the decisions of the trustee when the time comes. You will also want to remember to select a successor trustee – a “backup” trustee – in case the first choice of trustee is not able or not willing to take on the responsibility. Serving as trustee for a testamentary trust can be quite a commitment involving several years of maintenance and monitoring, so choose well and talk with the person you would like to serve as trustee in advance.
As noted, the beneficiaries of a testamentary trust are very commonly minor children with the trust set up to manage the assets the children would inherit should a parent pass away. If an individual has more than one child, it is possible to create more than one trust through a Will. The parent (or commonly these days the grandparent) will want to talk with an estate planning professional to discuss whether they should create one trust to handle all the funds of the estate for the benefit of all the children as a group (often called a “POT”, common or shared funds trust), or whether to divide the assets into percentages and create separate trusts, one for each beneficiary.
Just as with other forms of trusts, you can set forth parameters for the use of funds in a testamentary trust. For example, when used for minor children, it is common to include language indicating funds to be used for higher education and the basic needs of raising the children. However, you will not be around to monitor and make sure the trustee is following your wishes, so, again, it is good to discuss these things with your chosen trustee and make sure the trustee is someone you trust to honor your wishes.
You will also want to designate how long the testamentary trust should be in place. For example, if the trust is to manage assets for minor children, do you want the children to inherit the assets outright when they turn 18 years of age or wait until they are 21? What about 25 or after completion of college? If you have chosen to create a shared trust for multiple children, it is most common to have it terminate when the youngest child reaches a certain age, though this can mean your older children are not receiving their share of the funds outright until they are well into adulthood.
There are pros and cons for each type of trust. On the positive side, a testamentary trust is less expensive and easier to create than a revocable trust. You can change it as easily as changing your Will, and you can terminate it at any time by creating a new Will without the trust provisions. For example, if you had testamentary trust provisions in your Will to provide for your minor children, but time has passed and all your children are now grown so that there is no longer a need for those provisions, you just create a new Will without the trust language.
A testamentary trust will not, however, help avoid probate, and the probate court will be involved in overseeing the trustee’s handling of the trust. The trustee will be required to check in with the probate court periodically (commonly once per year) to confirm the trust is being managed properly. It can be very difficult for the beneficiary to get a change in trustee if the trustee does not follow your wishes laid out in the trust creating document, and you won’t be around to help advise whether the trust be being managed as you wanted.
There are several options available when considering what form of trust is right for you, so talk with your estate planning professional if you would like to learn more and see if a testamentary trust is right for you!