A testamentary trust is similar to a living trust but instead of being created during the creator's lifetime, the trust is created by a will after the will's creator passes.
A will can create multiple testamentary trusts and some or all assets in the estate may be assigned to the trust.
Purposes for a testamentary trust:
- Control property for minors or beneficiaries who spend recklessly
- Creating life estates for a beneficiary to use certain assets before those assets are distributed to someone else
The testamentary trust is irrevocable, meaning changes to the language cannot be made once the will's creator passes.
Testamentary trusts, like living trusts, have a trustor (the creator of the will), trustee (the person managing the trust) and beneficiaries. The trustee manages the assets for the benefit of the beneficiaries. The probate court oversees the implementation and management of the testamentary trust.Advantages
- The low cost upfront to create the will with the testamentary trust
- The protection of assets from young or reckless beneficiaries
- If you are not sure how much you can rely on your trustee to act responsibly, a court will oversee your trustee's activities
- The trustee must meet with the probate court regularly (if your trustee is reliable)
- Over time probate court and attorney fees could add up
- Assets in a testamentary trust do not avoid probate (depending on the size and location of your estate's assets)
A young family not concerned with probate and with few assets has a term life insurance policy for $500,000. The parents do not want their children to potentially receive a large sum of cash at age 18. The parents could create a will to name guardians for the children and include provisions for a testamentary trust to hold the life insurance proceeds until the children are age 30.
If the children need money prior to age 30, the children or their guardians may ask the trustee for a partial or full early distribution for health, education, maintenance or support needs. The trustee has the authority to approve or deny the request.
In a second marriage, the wife owns the primary residence. If she passes first, she would like her husband to continue living in the home until he chooses to move out or passes away. When either happens, the home is then distributed to her children. The testamentary can also hold money to help pay for the mortgage, taxes and utilities if the will instructs money to be transferred into the trust..
View a famous celebrity's last will and testament. You may notice a testamentary trust is created by the will to care for several of the celebrity's beneficiaries.