Testamentary Trust

What is a 'Testamentary Trust'

A testamentary trust is a legal and fiduciary relationship created through explicit instructions in a deceased's will. A testamentary trust goes into effect upon an individual's death and is commonly used when someone wants to leave assets to a beneficiary, but doesn't want the beneficiary to receive those assets until a specified time. A testamentary trust is irrevocable after the death of the testator.

Also called a Will Trust.

BREAKING DOWN 'Testamentary Trust'

A trust is a legal document which has directions for how the trustor’s property should be managed or held for his or her beneficiaries. A trust usually involves three parties:

  • The grantor or trustor – who creates the trust
  • The trustee – who manages the property held in trust
  • The beneficiary(ies) – who receives the benefits of the property held in trust

A trustor who transfers the ownership of assets to a trust can protect his assets and reduce the estate tax liabilities of his beneficiaries. The two main types of trusts that can be set up by a trustor are Living Trust and Testamentary Trust. A living trust goes into effect during the trustor’s lifetime. A testamentary trust, on the other hand, goes into effect after the death of the trustor.

A testamentary trust is established by the last will and testament of a testator who names the trust as his or her beneficiary. The testamentary trust is a provision made in the will that instructs the executor of the estate to create the trust. So even though the testator creates the will while he is alive, the trust does not come to play until after his death. After death, the will must go through probate to determine its authenticity before the testamentary trust can be created. After the trust is created, the executor follows the directions in the will to transfer property into the testamentary trust.

After a testamentary trust has been set up, the trustee appointed by the testator would manage the assets and property until the trust expires and the beneficiary receives control of them. The trust expires at a time provided for in its terms of agreement when a specific event has occurred. The event could be defined as the beneficiary reaching a certain age or the beneficiary graduating from college. When the event happens, the trustee transfers ownership of the assets to the beneficiary. From the time of the trustor's death until the time the testamentary trust expires, the probate court checks in periodically to ensure that the trust is managed properly and followed to the letter.

Generally, a testamentary trust is created to provide for disabled relatives and/or minor children until they are old enough to take care of themselves. The trust might delegate that a child receive a specified amount of money annually until he or she reaches a certain age. The testamentary trust might also direct that the child be paid a lump sum when they turn 25. In some cases, a beneficiary does not receive the property under a trust until he or she gets married.

The trustor can choose anyone to act as a trustee for the testamentary trust. However, the trustee appointed is not obligated to take on this role and may decline the request. If this happens, the court may appoint a trustee or relatives or friends of the beneficiaries involved may volunteer to act as the trustee for the testamentary trust.