One of the primary benefits of a trust is that the assets you include in the trust will likely avoid the probate process. There are different types of trusts and we can assist you in determining which ones are right for you.
A testamentary trust is a type of trust that is included in a will or a living trust, but does not go into effect until the person who created it dies. Trust administration is an important process and understanding how a testamentary trust works will help you make a choice.
Understanding a testamentary trust
A testamentary trust is simply a trust that is contained in a last will or living trust and provides for the distribution of an estate or a portion of an estate. It is possible to have more than one testamentary trust included in your will or living trust, depending on the types of property and beneficiaries you are dealing with. A trust agreement provides a way for your property to be transferred to the name of the trust, so that it can ultimately be transferred to the named beneficiaries upon your death. As with other types of trusts, the trustee is the person who will manage the trust property when the trust goes into effect.
A testamentary trust and a living trust are different
Non-testamentary trusts, also referred to as living trusts, become effective when the trust is signed and notarized and the property is transferred or funded to the trust. These non-testamentary trusts are also referred to as “living” trusts or “inter vivos” trusts because they become effective immediately, while the grantor is still living. A living trust can be created as either revocable or irrevocable, depending on the purpose of the trust. The majority of living trusts are revocable.
Irrevocable trusts generally cannot be modified or revoked once they have been created. As noted above, a testamentary trust can also be established within a living trust and, like one created by a will, will take effect upon the death of the trust creator.
A testamentary trust, on the other hand, does not become effective until the death of the person creating the trust. At that point, the testamentary trust becomes irrevocable. Yet, because the trust does not take effect until after death, the person who created the trust is free to modify its terms until his or her death. Understanding these differences is important for trust administration.
Using testamentary trusts for special beneficiaries
In many cases, testamentary trusts are created for young children or grandchilsren, relatives with disabilities or special needs, or others who may inherit a large sum of money and need assistance managing that money. Minors, for example cannot receive inherit gifts directly, because of their lack of maturity and legal capacity until they reach age 18. As such, those assets need to be managed by an adult. Including a testamentary trust in a will or living trust, however, allows you to leave a gift to a young person, as well as identify your selected guardian as trustee of that property. The trustee will then manage the trust until the minor reaches an age when they can manage the property themselves. It can be an age older than 18. Distributions can also be staggered over time, such as at ages 25, 30 and 35.
When does a testamentary trust typically take effect?
In the case of a Will, a testamentary trust in a will basically become effective once probate administration has been concluded, after the death of the person creating the trust. In the case of living trust, which will avoid probate if it is properly established and maintained, a testamentary trust can often be established shortly after the death of the trustor.
A testamentary trust will remain in effect until it is set to expire, which is determined by the specific provisions of the trust agreement. If the testamentary trust was established for a minor, then expiration commonly occurs when the minor has reached the age of majority, when he or she graduates from school or gets married. This is an important part of trust administration.
The role of the probate court in administering a testamentary trust established by Will
In such cases, the probate court may provide supervision of the administration of the trust from the time the trust goes into effect until the point when the testamentary trust expires. In some cases, it is the court’s duty to ensure that the trust property is being handled properly. Court supervision also means that, depending on how long the trust remains in effect, the legal fees could be substantial. This is something that should be considered when deciding whether to include a testamentary trust in your will.
In most cases, the court is not involved with testamentary trusts established in a living trust.
The importance of the trustee of a testamentary trust
The person creating a testamentary trust has the opportunity to select someone they trust to serve as trustee. It should be someone you believe will act in the best interests of your children or others beneficiaries. It is also a wise to name an alternates or successor trustees just in case the person you have initially chosen declines or cannot serve in that role for some reason. This is especially important in cases of trusts for very young persons as such trusts could be in effect for a long time. If you don’t name a sufficient number of trustees, a court may be required to appoint a trustee for you.
If you have questions regarding testamentary trusts or any other estate planning matters, please contact us. We are here to help!