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What Is A Testamentary Trust In A Will?

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A trust is a legal document that creates a fiduciary relationship in which one party holds legal title to a beneficiary’s property for the benefit of the beneficiary. A trust can go into effect prior to death, in which case it is called a living trust (or inter vivos trust). Such a trust could be a revocable trust (the person who created the trust retains control and can change it), or an irrevocable trust (no changes allowed once it’s in effect).

A trust could go into effect after death, and is contained in a last will and testament is a testamentary trust. There are two types of testamentary trusts:

  • Separate testamentary trusts: The decedent’s estate is split evenly amongst beneficiaries and put into separate trusts for each person.
  • Family testamentary trusts: All assets remain in one trust and the trustee distributes support as directed by the terms of the trust.

 

Who Is Involved In A Testamentary Trust?

The following parties are involved in a testamentary trust:

  • Settlor: The person who writes the will and other legal documents that create the trust. This person is also called the “grantor,” “trustor,” or “testator.”
  • Trustee: The person who manages the trust assets according to the terms of the trust document. A trustee holds the legal title to those assets.
  • Beneficiary(s): The person, people, or entities that will benefit from the trust. Beneficiaries of a testamentary trust are often minor children, family members, and loved ones with disabilities or mental illness.
  • Probate court: The probate court has jurisdiction over the probate of wills and the administration of estates.

 

Why Choose a Testamentary Trust?

All types of trusts are tools for asset protection. People choose to create a testamentary trust for two reasons:

  1. The settlor retains control over their own assets during the settlor’s lifetime.
  2. A testamentary trust gives the settlor more control over the timing of the distribution of assets after the settlor’s death.

A testamentary trust can specify when a beneficiary receives money and how much they will receive. For example, it could specify that young children receive payments from the trust once they reach a certain age. It can also specify that they receive a certain amount in the early years and a greater amount later (or vice versa).

A settlor may choose to create a family testamentary trust, instead of separate trusts, if they suspect that one beneficiary may need more support over time than other beneficiaries. Such an arrangement can allow the trustee more discretion in how funds are used for the benefit of the beneficiaries.

Disadvantages of a Testamentary Trust

Assets held in a previously established trust transfer to the trust beneficiaries immediately upon the death of the settlor. Trusts generally avoid the probate process. A will must go through the probate process. The testamentary trust will come into effect upon the completion of probate, which can be time-consuming and can expose assets to estate tax.

 

Creating a Testamentary Trust in a Will

A testamentary trust is not automatically created upon the settlor’s death. The first legal document to take effect is the last will and testament. The testamentary trust must be contained in the settlor’s final will. To create a testamentary trust, the settlor must designate a trustee (and possibly successor trustees) as well as beneficiaries of the trust. The document that creates the trust should also state which assets will enter the trust — real estate, life insurance proceeds, bank accounts, all assets of the estate, etc.

During the probate process, the provisions of the trust are reviewed by all parties. The executor of the will transfers assets into a trust fund. Then the trustee manages the trust assets until the trust terminates. The trustee may be required to report to the probate court on a regular schedule to satisfy the court that trust funds are being handled in accordance with the will and state law.

 

Example of a Testamentary Trust at Work

Jim has a 3-year-old daughter, Amy, and he wants her to receive his assets after he dies. In his will, he states that he is creating a testamentary trust. He designates his brother, Bob, as the initial trustee and his mother as a successor trustee. The trust document specified in the will says that Bob will manage the trust property and assets for the benefit of Amy until she reaches the age of 21. Bob will give Amy a monthly income for education and expenses. When she turns 21, she will receive the remaining assets and the trust will terminate.

Who Does a Testamentary Trust Involve?

A testamentary trust involves three parties. The grantor or settlor is the person who creates the trust in order to transfer his or her assets. The beneficiary is the person or entity who is the recipient of the assets. The trustee handles the trust and manages the assets until the beneficiary takes over.

For example, a settlor may have a 3-year-old daughter to whom he or she wants to leave a certain amount of assets. The settlor could name his or her brother as the trustee, meaning that the brother will be responsible for managing the assets until the settlor’s daughter reaches the age of 18, or whichever milestone the settlor marked in the will. Once the settlor’s daughter, who is the beneficiary, turns 18, she will receive the assets and the trust will terminate.

Since a testamentary trust is formed within a will, the probate court is also an involved party. The probate court must first determine the authenticity of the will. Only once that’s established will the trust be created. The probate court is also there to ensure that the trustee is correctly handling the trust per the will for the duration of the trust. The trustee may have to go to probate court once a year. A testamentary trust expires when the beneficiary receives the assets.

How to Create a Testamentary Trust

A person creates a testamentary trust as part of a last will and testament. There can be more than one testamentary trust in a last will and testament. A testamentary trust does not take effect until the settlor dies. To create a testamentary trust, the settlor first must select the trustee and the beneficiary and specify the assets that are to be placed in trust. The settlor also has the ability to specify when and how to disburse the trust to the beneficiary. The last will and testament should detail all of this information.

Upon the settlor’s death, the will goes through the probate process. Once this is complete, the trust is created and funds can begin to be disbursed. Many testamentary trusts include provisions specifying when some or all of the beneficiaries receive their trust allocations (e.g., at age 18). If this is the case, the trustee must go to probate court annually until the conditions are met to state that the trust is being handled in accordance with the will.

Advantages and Disadvantages of Testamentary Trusts

The major benefit of a trust is that it gives the settlor control over when and how his or her assets are disbursed. This is especially important for settlors who have young children or grandchildren. With a testamentary trust, assets can remain protected until the child is old enough to be financially responsible.

Another advantage of a testamentary trust is that it can be funded with life insurance proceeds after death. To do this, the settlor must list the beneficiary of the life insurance policy as the trustee of the trust. Then, once the settlor dies, the life insurance policy will pay out into the trust.

While a testamentary trust has low upfront costs, the fees from probate court can add up. The trustee needs to meet with the probate court annually until the beneficiary receives the assets. If the trust endures for many years, the court fees can eat up a significant chunk of money.

Creating a trust after death can also cause its own problems. The trustee may be unsure how to interpret the provisions and can no longer ask the settlor. The trustee might not even want the responsibility. In this case, any family member can volunteer or the court can appoint a trustee. However, this might be against the settlor’s wishes. But he or she no longer has the ability to contest, since he or she is dead.

For someone who wants to create a trust and have control over asset disbursement, it may be in their best interest to create a revocable trust while alive. With a revocable trust it’s easier to have discussions and make any necessary changes. Revocable trusts also aren’t subject to the probate process, as they’re created outside of the will.

Types of Testamentary Trusts

Before looking at the various benefits of a Testamentary Trust, it can be helpful to understand the different types. There are two main forms to be familiar with:

  • Separate Trusts
  • Family Trusts

 

Separate for Children Testamentary Trust

When looking at how to set up a Testamentary Trust, separate Trusts simply means creating a specific Trust for each beneficiary. In many cases, this means creating separate Trusts for each child that equally split one’s assets. These Trusts are then managed and distributed individually, as opposed to all at once.

 

Family Testamentary Trust

The other type of Testamentary Trusts are considered “pot” Trusts, essentially meaning all of one’s assets are managed together. Family Testamentary Trusts allow parents to distribute assets based on each child’s needs. These Trusts are typically used by parents who need or want to leave more funds to one child. For example, if there is a child with special needs who requires additional financial support.

 

Compared to Living Trusts

Non-testamentary trusts take effect when the grantor signs the trust, has it notarized, and transfers property into the trust. This type of trust is called an “inter vivos” or “living” trust because it goes into effect during the grantor’s lifetime. Inter vivos trusts can be either revocable or irrevocable.

  • Revocable inter vivos trust: A trust that goes into effect during the grantor’s lifetime, and can be revoked at any time. The most common type of revocable inter vivos trust is a living trust designed to avoid probate.
  • Irrevocable inter vivos trust: A trust that goes into effect during the grantor’s lifetime, and cannot be revoked after it is finalized. This type of trust is usually used to transfer ownership of property to reduce taxes.

In contrast to these types of trusts, a testamentary trust does not take effect until death of the trust maker, and at that time the trust becomes irrevocable. Because it does not take effect during the grantor’s lifetime, the grantor is free to make changes to the trust until his or her death.

 

What are the Requirements for a Trust?

The requirements for creating a trust vary by state, but usually share the following necessary elements:

  • Settlor capacity;
  • Identifiable property;
  • An identifiable beneficiary; and
  • A proper trust purpose.

The settlor is the individual who established the trust. They can also be known as the:

  • Donor;
  • Grantor;
  • Trustor; and/or

 

In order for the trust to be valid, the settlor must have the proper mental capacity to create the trust. This means they must have intended to create a trust with any necessary formalities of the state, including being in writing. The trust must contain specifically identifiable property, or trust res. There must be enough detail or enough of a description of the property to know exactly what property is to be held in the trust.

Additionally, the beneficiary and/or group of beneficiaries to the trust must be sufficiently identifiable. They must be determined at the time the trust is created. It is important to note that for a charitable trust creation, this is often not a requirement.

The trust must have a proper purpose when formed, meaning it cannot be created for an illegal reason. For example an individual cannot create a spendthrift trust in order to hold property in their own name for their own benefit simply to keep creditors from reaching those assets. A court will usually hold that such trusts are invalid.

In general, all trusts in the Utah are presumed to be irrevocable, unless the instrument states otherwise. However, there are some states, such as Texas, Oklahoma, and California, where trusts are presumed to be revocable, unless otherwise stated in the instrument.

Difference Between a Testamentary Trust and a Non-Testamentary Trust

A non-testamentary trust, also known as a living trust, goes into effect when the grantor signs the trust, has the trust document notified, and actually transfers the property into the trust. Non-testamentary trusts are known as living trusts because they go into effect during the grantor’s lifetime. In addition, non-testamentary trusts can be revocable and/or irrevocable.

In contrast, a testamentary trust does not take effect during the grantor’s lifetime, but is created upon the death of the trust maker, as noted above. Prior to the grantor’s death, the trust is revocable and the grantor is free to make any changes to the trust. However, at the time of the grantor’s death, the testamentary trust becomes irrevocable.

How is a Trust Different from a Will?

  • A trust and a will are very different. In a trust, the assets and/or property are first transferred to a trustee. The trustee then distributes the property to the beneficiary according to the instructions provided by the trust creator. Not all trusts created are testamentary trusts. Some trusts are created during the testator’s lifetime, such as living trusts.

    A will is an estate planning document that allows an individual to provide instructions on how their property should be distributed upon their death. Property distributed in a will can be real property, money, and/or personal property. Pursuant to a will, property generally goes directly to a beneficiary. This is generally handled by the will administrator due to the testator being deceased, but the property still passes directly.

    The trustee of a testamentary trust can be any individual the grantor desires. This can include the executor of the will, the individual’s spouse, and/or their children. The trustee of the testamentary trust will have effective control of the property. Therefore, the testator should name a trustee whom they know and trust to act in the best interest of the beneficiaries of the estate.

    It is important to have the help of an experienced trust lawyer when creating a testamentary trust. These types of trust can require foresight and planning in order to ensure the distributions will occur as you desire. An attorney can assist in drafting the testamentary trust and ensuring your property is distributed properly. Additionally, the lawyer can ensure the trust is valid under local state laws. A lawyer can also represent you during any court proceedings, such as a trust dispute, if necessary.

     

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