A testamentary trust (also called a will trust or trust under will) is an irrevocable trust, included in a will, that goes into effect upon the death of the testator. The purpose of the trust is to disperse an estate and proceeds typically from life insurance policies. A testamentary trust will provide extra protection to assets, rather than what is protected by a will. Other benefits of a testamentary trust are to minimize inheritance taxes and probate costs and to have greater control over the distribution of your assets.
Possibly the biggest decision to be made with a testamentary trust is who will be appointed as the trustee. The trustee has a fiduciary duty to the beneficiary, and therefore this should be a well thought out decision and should be someone that the testator knows well and trusts. The trustee holds the power to distribute the assets, controls the trust, manages tax preparation and filing, and makes decisions about investing the trust’s assets. The testator may designate primary beneficiaries, secondary beneficiaries, and tertiary beneficiaries.
Testamentary trusts are used by people with wide range of needs. A common reason to use this trust is when the estate of the testator is much smaller than what is to be paid out by life insurance. A common type of testamentary trust is for the benefit of a child or children, also called a “child’s trust.” The purpose of this trust is to leave the assets to the children, but because a minor is unable to receive funds directly, the trust allows you to leave the assets to the children, with the management and supervision of the trustee. Often times the trust is set up to give minor children scheduled payments. Another common reason for a testamentary trust is for families that have a child with special needs.
Testamentary trusts are not for everyone, and there are many different options for trusts to consider. A qualified estate planning attorney will be able to advise you on the advantages and disadvantages to wills and trusts to determine what estate plan best fits your needs, based on the complexity of your estate.