What Is a Testamentary Trust?
A testamentary trust is an estate planning device which creates a trust pursuant to a person’s will upon that person’s death.
The testamentary trust does not come into being until the grantor’s death, when a trust is created to hold some or all of the decedent’s assets and property, however much of the decedent’s assets or property that is placed in the trust being left to the discretion of the grantor/decedent.
The assets and other property in the trust is then managed by a trustee who is appointed by the grantor/decedent according to the terms set forth by the grantor/decedent in his or her will.
What Is The Difference Between a Living Trust and a Testamentary Trust?
There are a number of differences between a testamentary trust and the more standard form of a trust, what is generally known as a living trust.
The first major difference between a living trust and a testamentary trust is when the trust itself is created. A living trust is created while the grantor is still alive (thus its name), whereas a testamentary trust is created as a part of the grantor’s death.
Simultaneously with the grantor’s death and his or her will being submitted to probate, a testamentary trust is created pursuant to a provision in the grantor’s last will and testament.
The assets or property in the trust are then managed according to the terms of the testamentary trust rather than simply distributed to the beneficiaries in the normal course of the probate process.
A testamentary trust also differs from a living trust in that the probate court oversees the creation and implementation of the trust. Judicial involvement and/or oversight of the distribution and/or transfer of assets or property can be avoided altogether by the use of a living trust, assuming the grantor transfers ownership of all of his or her assets or property to a living trust prior to his or her death.
This is because, at the time of his or her death, legal ownership of the assets and property would be in the living trust, and not in the hands of the decedent.
If those assets and property have already been placed in a living trust, then there is nothing for the probate court to administer.
However, if those assets are transferred upon death into a testamentary trust, the probate court will approve and supervise that process, but the actual management or distribution of those assets will be performed by the trustee according to the terms set forth in the testamentary trust.
The Advantages of a Testamentary Trust Vs a Simple Will
Although a living trust may be more advantageous than a testamentary trust in some respects and in some situations, a testamentary trust is preferable to simply dying with or without a will because of the control that it allows a grantor to exercise over his or her assets or property even after his or her death.
First off, by using a testamentary trust, the grantor has the ability to set the terms of how those assets will be managed (i.e. when they will be given to the recipient, in what amount, etc.) by spelling those terms out specifically in the portion of his or her will setting up the testamentary trust.
Secondly, the grantor has the ability to name a particular individual to serve as the trustee and manage whatever assets or property are placed into the testamentary trust. This differs from the normal process of a will or dying intestate (without a will), where the decedent’s assets or property are simply transferred to the recipient upon the grantor’s death without any say in when those assets are actually disbursed and/or transferred to the individual recipient.
For example, a testamentary trust is particularly useful where the beneficiaries of the assets or property in the testamentary trust are minor children. Under the laws of most U.S. jurisdictions, a beneficiary under a will who is a minor child would receive any bequests under a decedent’s will but the minor would not have access to those assets or property until he or she turned 18.
By using a testamentary trust, the grantor ensures that he or she controls who is overseeing the assets on behalf of that minor. Therefore, the grantor through the trustee that the grantor appoints, rather than the minor’s parent or legal guardian, decides how the bequest left to that minor child is managed.
This can be beneficial if, for instance, the grantor wishes to leave a certain asset or property to a minor but would like someone other than the minor’s parent or legal guardian to manage the assets or property.