A Testamentary Trust is created under a Last Will and Testament. It exists in the Will only until the death of the Testator. The property and assets then pass to the Trust. This type of trust is amendable and revocable at any time during the Testator's lifetime, but becomes irrevocable upon the Testator's death.
Since a Testamentary Trust does not come into existence until the Testator's death, it cannot be used to avoid probate or to provide continuity or management of the Testator's property in the event that he/she becomes incapacitated.
After the Testamentary Trust goes into effect, the Trustee that was chosen by the Testator looks after the funds in the Trust. He/she will continue in this capacity until the Trust expires. The Trust can be set to expire at the time of a specific event, such as when a Beneficiary reaches a certain age, or finishes college.
If the originally chosen Trustee declines the responsibility, the court may appoint someone, or people or friends of the Beneficiaries involved may volunteer to perform as a Trustee.
Testamentary Trust Advantages
These types of trusts offer flexibility when assigning a Trustee. The Testator may name any individual he/she chooses as the Trustee to the Trust. It is advisable to discuss this with close, trustworthy friends and family to determine the best person for the position. It is also possible to establish multiple Testamentary Trusts under a Will and name different Trustees for each of them.
A Testamentary Trust is considered its own legal entity, so it is taxed separately from the individual Beneficiaries. This provides certain tax benefits, especially when bequeathing part of the estate to minor children. These trusts can also meet the needs of minor children by providing regular payments until the children reach a certain age. The funds can also be earmarked to pay for education and/or other specific expenses.
They can provide protection from creditors and litigants in professional negligence claims, which ensures that the Beneficiaries receive the full inheritance that the Testator has determined. Special conditions can be set up so that it also protects spendthrifts and intellectually impaired Beneficiaries, as well.
A Testamentary Trust can also be used to reinforce how the Testator wants his/her property distributed. With these trusts one can distribute the payments from the Trust over a period of time rather than transferring the money in one lump payment. This can be helpful when providing income for minor children and Beneficiaries with disabilities.
They are similar to Family Trusts, but offer considerably more tax advantages for minor Beneficiaries than Family Trusts.
Setting up a Testamentary Trust
Bear in mind that there will be ongoing administrative costs required for maintaining a Trust. Determine whether you possess enough sole assets and the income generated by your estate would be sufficient for a Testamentary Trust to be beneficial to you and your family. It is advisable to consult with your accountant, attorney and/or financial advisor to make this determination and review the advantages and disadvantages of setting up a Testamentary Trust.
If you choose to proceed, ask your attorney to create a Testamentary Trust under your Will. If you are not certain, another alternative is having a Testamentary Trust included as an option in your Will, and the Trustee will make the decision of whether or not to implement the Trust after your death.
Arrange for a Testamentary Trust for each of your Beneficiaries. This will result in each of them being within the lowest possible tax bracket when taxes come due.
Set up a Spousal Testamentary Trust to take care of your spouse after your death. You can have your attorney structure the Trust so that the remaining assets pass to your children or any other parties you choose after your spouse dies.
You and your spouse should draft your Wills at the same time so that they mirror one another and include the Spousal Testamentary Trust. If one spouse passes before the other, the surviving spouse should review his/her Will again and provide for the Testamentary Trust to have new Beneficiaries.
Types of trusts and Living Trusts - HG.org. (n.d.-e). https://www.hg.org/types-of-trusts.html