A testamentary trust is a type of trust that is created by a will and takes effect only after the person who made the will — called the testator — dies. Unlike a living trust which is created and funded during the grantor’s lifetime a testamentary trust does not exist until after death and is funded with assets that pass through the estate after the probate process is complete.
Testamentary trusts are commonly used to manage and protect assets for beneficiaries who are not yet ready or able to manage significant sums of money on their own including minor children, young adults, and people with disabilities or financial difficulties.
How a testamentary trust works
A testamentary trust is created within the terms of a will. The will specifies the terms of the trust including who the trustee will be, who the beneficiaries are, how and when assets will be distributed, and when the trust will end.
When the testator dies the will goes through probate — the court supervised process of validating the will and distributing the estate. Once the probate process is complete the assets designated for the testamentary trust are transferred into it and the trustee begins managing them according to the trust’s terms.
Why testamentary trusts are used
Testamentary trusts are most commonly used in situations where the testator wants to leave assets to a beneficiary but does not want those assets distributed all at once or immediately. Common reasons include:
- Minor children — a parent may not want their minor children to receive a large sum of money outright when they turn 18 which is the age at which direct inheritances typically become available. A testamentary trust allows the parent to specify that assets be managed by a trustee and distributed gradually — for example for education and living expenses until the child reaches a specified age.
- Young adults — even adult children in their 20s may not be ready to manage a large inheritance responsibly. A testamentary trust can delay full distribution until the beneficiary reaches a more mature age such as 25, 30, or 35.
- Beneficiaries with disabilities — a testamentary special needs trust can hold assets for a beneficiary with a disability without disqualifying them from government benefits such as Medicaid and SSI
- Beneficiaries with financial difficulties — if a beneficiary has creditor problems, is going through a divorce, or has a history of poor financial management a testamentary trust with a spendthrift provision can protect their inheritance from creditors and poor decisions
- Blended families — a testamentary trust can ensure that assets are used to support a surviving spouse during their lifetime while ultimately passing to children from a prior relationship after the surviving spouse dies
Testamentary trust vs living trust
Testamentary trusts and living trusts are both useful estate planning tools but they have important differences:
- When created — a testamentary trust is created by a will and takes effect after death. A living trust is created and funded during the grantor’s lifetime.
- Probate — assets that fund a testamentary trust must go through probate before being transferred into the trust. A living trust avoids probate entirely.
- Privacy — because a testamentary trust is created through a will and the will goes through probate it becomes a public record. A living trust remains private.
- Court supervision — testamentary trusts are typically subject to ongoing court supervision because they are created through the probate process. Living trusts generally are not subject to court supervision after they are created.
- Cost — a testamentary trust is generally less expensive to create than a living trust because it is simply a provision within a will rather than a separate document. However the ongoing court supervision of a testamentary trust can add costs over time.
- Flexibility during lifetime — because a testamentary trust does not exist until death it does not provide any benefits during the testator’s lifetime such as incapacity planning. A living trust can also protect the grantor if they become incapacitated.
Who should be the trustee
The trustee of a testamentary trust is named in the will and is responsible for managing the trust assets and making distributions according to the trust’s terms. Choosing the right trustee is an important decision. Options include:
- A trusted family member or friend who is financially responsible and understands the testator’s wishes
- A professional trustee such as a bank or trust company that provides trustee services for a fee
- An attorney or accountant familiar with trust administration
- A combination of an individual co-trustee and a professional co-trustee
For testamentary trusts that will last many years or involve significant assets many families choose a professional trustee or co-trustee to ensure proper management and continuity.
Court supervision of testamentary trusts
One significant difference between testamentary trusts and living trusts is that testamentary trusts are typically subject to ongoing court supervision. This means the trustee may be required to file regular accountings with the court documenting trust assets, income, expenses, and distributions. While this provides a level of oversight and protection for beneficiaries it also adds administrative costs and complexity.
The level of court supervision required varies by state. Some states require annual accountings while others require less frequent reporting. An estate planning attorney familiar with your state’s laws can advise on the specific requirements.
Creating a testamentary trust
A testamentary trust is created as part of a will. To create one work with an estate planning attorney to include trust provisions in your will that specify:
- The name and purpose of the trust
- Who the trustee and successor trustees are
- Who the beneficiaries are
- What assets will fund the trust
- How and when distributions will be made
- What the trustee’s powers and responsibilities are
- When the trust will end and how remaining assets will be distributed
Key terms to know
- Testamentary trust — a trust created by a will that takes effect after the testator’s death
- Testator — the person who creates a will
- Probate — the court-supervised process of validating a will and distributing an estate
- Trustee — the person or organization responsible for managing the trust assets
- Beneficiary — the person or organization that receives benefits from the trust
- Spendthrift provision — a trust provision that protects a beneficiary’s inheritance from creditors and poor financial decisions
- Living trust — a trust created and funded during the grantor’s lifetime that avoids probate
- Special needs trust — a trust designed to hold assets for a person with a disability without affecting their government benefit eligibility
Sources
- American Bar Association — Public Resources
- USA.gov — Estate Planning
- National Institute on Aging — Getting Your Affairs in Order
This article is for general informational purposes only and does not constitute legal advice. Trust laws vary by state and are subject to change. Consult a licensed attorney for guidance specific to your situation.