There are many varieties of trust available for use in estate planning. A majority of these trusts are established while the grantor is still alive. A testamentary trust differs from other trust structures in that it is created in a will. Therefore, the trust only becomes effective upon the grantor’s death. Testamentary trusts rely on the same format as other trusts whereby the individual who creates the trust referred to as a grantor places assets in a trust for an individual who receives the benefit from the trust (the beneficiary). The trustee, a person or legal entity, holds legal title to the assets for the future benefit of recipients and handles managing the assets, according to the terms of the trust. However, the main difference here is that the conditions of the trust are detailed in the grantor’s will and are contingent upon the death of the grantor.
Like other trusts which contain a trust document that provides details as to how the trust is to be administered, a testamentary trust’s instructions are provided in the grantor’s will.
As an example, a will may contain estate assets worth $100,000 to be placed in a testamentary trust which the decedent’s only minor child would stand to inherit. The will would specify that all estate assets will be held in a separate trust for the minor child and managed for the benefit of the child until he reaches the age of 20. The will would also designate a trustee and assign an alternative trustee in the even the original trustee is unwilling or unable to fulfill his or duties. Further, the clause in the will establishing the testamentary trust would also provide additional conditions as to trust management such as to how the trust assets should be invested and in what manner and under what circumstances payments should be made to the beneficiary.
One may ask what advantages a testamentary trust offer over an inter vivos trust or living trust. For individuals whose estate plan must consider their children’s financial future, in the event the parent or parents die before children are old enough to manage a windfall inheritance responsibly, a testamentary trust offers the ability to provide a safe and consistent source of income for a minor or allow them to access the trust when they have attained a certain age. Further, a testamentary trust can divide assets in a manner that each child will have his or her trust.
In the absence of a testamentary trust, children who stand to inherit from their parent’s estate may be left with an untenable situation, as the probate court will be forced to appoint a guardian or custodian to manage the children’s affairs. Usually, the court will establish some means of providing support to the children from estate assets, with portions being divided equally. Further, any major distributions will require court approval. When the children reach the age of majority remaining funds will be released in equal shares. Under this scenario, the ability to manage how assets are distributed will be left to the probate court and the guardian or custodian to decide and may not be in line with what parents would have planned with a testamentary trust in place.
Counsel experienced in estate planning involving testamentary trusts can assist an individual or their families in asset preservation strategies involving minor children.
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