What is a Testamentary Trust?
A testamentary trust is a dormant trust created in a Will. It lies dormant until the death of the person creating it springs it to life.
Unlike a trust that you create and fund during your life, such as a revocable trust or an irrevocable trust, a testamentary trust does not hold any assets until after you die.
Your Will may contain several testamentary trusts for various beneficiaries. For example, you can create a testamentary trust for the benefit of a spouse, children, or a disabled relative.
Leaving assets in trust for beneficiaries gives you the opportunity to appoint a trusted friend or family member to manage a beneficiary’s inheritance. The trust’s terms provide instructions to the Trustee concerning how and when to distribute trust funds to a beneficiary.
What are the Benefits of a Testamentary Trust
It is always possible to make an outright distribution to a beneficiary; however, testamentary trusts offer multiple benefits:
- They allow you to select someone you trust to manage assets for a beneficiary so that funds can be distributed according to your wishes.
- They typically contain spendthrift language that prohibits a beneficiary from selling, giving away, or otherwise transferring his or her interest in the trust assets. This provides a beneficiary with asset protection that would not be available with an outright distribution.
- They allow you to control who will receive the assets remaining in the trust after the beneficiary dies.
How Long Does a Testamentary Trust Endure?
A testamentary trust can be created to last for a finite number of years or for the lifetime of the beneficiary.
For example, a testator can specify that the trust will terminate after a beneficiary attains a particular age when they would have the maturity and experience to manage those assets. A testamentary trust can also last for the lifetime of the beneficiary.
That doesn’t mean that the beneficiary can never have control of the trust. In fact, you can allow a beneficiary to elect to be a co-trustee or sole trustee when the beneficiary attains a particular age.
Does a Testamentary Trust Avoid Probate?
A testamentary trust in a Will does not avoid probate. Wills go through probate because probate is the process of validating a Will.
During the probate process, an executor gathers a decedent’s assets, pays off enforceable death, and transfers assets to the decedent’s beneficiaries in accordance with the Will. If you have created a testamentary trust, your executor will fund the trusts you create during probate.