With a trust agreement, your property is transferred to the name of the trust to ultimately be transferred to the named beneficiary upon your death. The trustee is the person who manages the property until that time. One benefit of a trust is that the assets included in the trust will be able to avoid the probate process. There are different types of trusts. A testamentary trust, unlike a living trust, does not go into effect until the grantor (the person who made the trust) dies. Here is what you need to know.
What is a testamentary trust?
A testamentary trust is one that is contained in a last will and testament and provides for the distribution of all or part of an estate. A testamentary trust often include the proceeds from a life insurance policy held on the grantor. It is possible to have more than one testamentary trust per will.
The difference between a testamentary trust and a living trust
Non-testamentary trusts, also called living trusts, take effect when the trust is signed and notarized and the property is transferred to the trust, known as funding the trust. Those types of trusts are also referred to as “living” trusts or “inter vivos” trusts because they actually go into effect immediately, while the grantor is still living. These types of trusts can also be created as either revocable or irrevocable, depending on the purpose of the trust.
On the other hand, a testamentary trust does not become effective until the death of the grantor. It then becomes irrevocable. However, since the trust does not take effect until after death, the grantor is free to modify the terms of the trust until his or her death.
Testamentary trusts for children
In most cases, testamentary trusts are established for young children, relatives with disabilities, or others who may inherit a large sum of money. Minors cannot receive substantial gifts directly, because those assets must be managed by an adult. Including a testamentary trust in a will, though, allows you to leave a gift to a child, while identifying your chosen guardian as trustee of that property. The trustee will manage the trust until the minor reaches an age when they can manage the property themselves.
When does a testamentary trust usually take effect and how long does it last?
A testamentary trust basically becomes effective upon the completion of probate administration, after the death of the grantor of the trust. This type of trust lasts until it is set to expire, which is determined by the specific terms of the trust agreement. With trusts established for minors, expiration commonly occurs when the minor has reached the age of majority or older, when he or she graduates from school or gets married.
What is the role of the probate court?
Just as with most trust, the probate court will supervise the administration of the trust from the time the grantor dies and the trust goes into effect until the testamentary trust expires. It is the court’s role to ensure that the trust property is being handled appropriately. Court supervision means that, depending on how long the trust remains effective, legal fees can be substantial. This is a factor that should be considered when determining whether to include a testamentary trust in your estate plan.
What about the trustee of a testamentary trust?
As the person creating a testamentary trust, you may select anyone to serve as trustee, but it should be someone you trust will act in the best interests of your children or others beneficiaries. It is also a good idea to name an alternate or successor trustee in case the person you have chosen declines or cannot serve in that role for any reason. Otherwise, the court will be required to appoint a trustee.
How do I know if a testamentary trust is a good option for me?
One situation where a testamentary trust may be desirable is when your estate is small in comparison to the life insurance proceeds that will be paid to the estate upon your death. Another advantage is that the potential cost of setting up a testamentary trust is usually inexpensive as part of preparing your will and other estate planning tools.
If you have questions regarding a testamentary trust, or any other estate planning needs, please contact the Schomer Law Group for a consultation, either online or by calling us at (310) 337-7696.