UPDATED: February 5, 2020
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A testamentary trust is a form of trust that is established in your will. Unlike living trusts or inter-vivos trusts, a testamentary trust will only go into effect upon your death. A testamentary trust is a good way of establishing a trust for estates that are less than the annual estate tax rate and for preparing for unforeseen circumstances, such as a trust to care for your children should they be orphaned. A testamentary trust can also provide care for an incapacitated spouse or child upon your death.
Advantages and Disadvantages of a Testamentary Trust
A testamentary trust ensures that your estate will be distributed in a more controlled manner than an outright gift in your will. Your testamentary trust can be as complex or as simple as you see fit and can include spendthrift, discretionary and guardian provisions. If your total wealth is less than the annual estate tax amount, then your testamentary trust will not have any estate taxes attached. Finally, a testamentary trust gives you the ability to choose a responsible trustee to oversee your wealth and investments. This ensures that your surviving family will receive a larger amount overall.
One of the disadvantages of a testamentary trust is that it does go through probate--the legal proceedings of distributing the estate of a deceased person in accordance with a will. This happens because the testamentary trust was placed in your will and no property has actually been deposited into the trust to date. Normally, when a living trust is formed, the bulk of your property is placed into the trust in advance ensuring that nothing is lost or stolen during the transition and that your property will not go through probate.
Another disadvantage of a testamentary trust is that it will not be private. All of your assets will be transferred into the trust under the court’s supervision, leaving behind a public record of your wealth. Finally, if your estate is greater than the annual estate tax rate for that year, your surviving family will be responsible for paying estate taxes.
Establishing Testamentary Trusts for Minors
If you've begun your estate planning and don't trust your children's designated guardian to keep track of the wealth you leave behind for your children should you die while they are still minors, then a testamentary trust is a good option for you. Unlike a traditional trust, which is set up and receives property deposits while you are alive, a testamentary trust only goes into effect upon your death. Because a testamentary trust is established on your death, life insurance and other pay-upon-death accounts can be automatically deposited into the trust, keeping them out of the hands of creditors.
Testamentary trusts for minors are typically set up with specific instructions that payments only be made for the welfare, health, and education of your minor children. This ensures that the money is available when the children’s guardians need it, but that none of the funds go to waste.
A Testamentary Trust for an Incapacitated Family Member
For those with spouses or children with disabilities, setting up a testamentary trust with specifications for care and limits on when the funds can be released can ensure that your estate provides for that incapacitated family member through their entire life.
If a testamentary trust sounds like a good estate planning option for you, contact an estate planning attorney for a consultation.