What is a Testamentary Trust?
A testamentary trust is a trust created in a Will that lies dormant until the death of the testator (the person creating the Will) springs it to life.
Unlike a trust created and funded during one’s lifetime, such as a revocable living trust or an irrevocable trust, no assets are transferred into a testamentary trust until the testator dies.
A will may contain several testamentary trusts for various beneficiaries. For example, a testamentary trust can be created for the benefit of a spouse, for children, or for a disabled relative.
Leaving assets in trust for beneficiaries gives a testator the opportunity to direct how and when trust funds are distributed to the beneficiary and to control how assets remaining in the trust are disposed of after the beneficiary’s death.
For example, suppose you have minor children or adult children who are spendthrifts. Your will or trust can specify that all assets left to your children will not be distributed outright to them but rather held in trust for their benefit by trustee you choose to manage those assets. The Trustee will then be able to make distributions to your beneficiaries based on guidelines you have set.
Testamentary trusts offer multiple benefits.
They allow you to select someone you trust to manage assets for a beneficiary so that funds can be distributed according to your wishes.
Additionally, testamentary trusts typically contain spendthrift language that prohibits a beneficiary from selling, giving away, or otherwise transferring his or her interest in the trust assets, which prevents a beneficiary’s creditors from reaching the beneficiary’s interest in the trust. This provides a beneficiary with assets protection that would not be available with an outright distribution.
A testamentary trust can be created to last for a finite number of years or indefinitely.
For example, a testator can specify that the trust will terminate after a beneficiary attains a particular age, when they would have the maturity and experience to manage those assets.
A testamentary trust can also last indefinitely, and allow a beneficiary to elect to take control of the trust as trustee when the beneficiary attains a particular age.
A testamentary trust in a Will does not avoid probate. Rather, probate will be necessary to transfer assets belonging to the testator to the testamentary trust after the testator dies.