Placing a Testamentary Trust in a Will

The last will and testament and trust are two important estate planning tools for designating property distribution at death. A testator, the person creating the will, can use a will to create a trust at the testator's death. This is called a testamentary trust. It's a type of express trust written into a will or in a document incorporated by reference into a will.

What Is a Trust?

A trust is a legal document creating a fiduciary relationship. One party holds legal title to a beneficiary's property for the beneficiary's benefit.

A trust can go into effect before death. The settlor is the person who creates the trust. When the trust goes into effect during the settlor's lifetime, it is called a living trust (or inter vivos trust).

Such a trust could be a revocable trust (the person who makes the trust retains control and can change it) or an irrevocable trust (no changes allowed once it's in effect).

A trust contained in a last will and testament that goes into effect after the testator's death is called a testamentary trust. There are two types of testamentary trusts:

• Separate testamentary trusts: The decedent's estate is split evenly among named beneficiaries and put into separate trusts for each person.
• Family testamentary trusts: All assets remain in one trust, and the trustee distributes support as directed by the terms of the trust.

Who Is Involved in a Testamentary Trust?

The following parties are involved in a testamentary trust:

• Settlor: The person who writes the will and other legal documents that create the trust. This person is also called the "grantor," "trustor," or “testator."
• Trustee: The person who manages the trust assets according to the terms of the trust document. A trustee holds the legal title to those assets.
• Beneficiary(s): The person, people, or entities that will benefit from the trust. Beneficiaries of a testamentary trust are often minor children, family members, and loved ones with disabilities or mental illness.
• Probate court: The probate court has jurisdiction over the probate of wills and the administration of estates.

Why Choose a Testamentary Trust?

All types of trusts are tools for asset protection. People choose to create a testamentary trust for two reasons:

1. The settlor retains control over their own assets during the settlor's lifetime.
2. A testamentary trust gives the settlor more control over the timing of the distribution of assets after the settlor's death.

A testamentary trust can specify when a beneficiary receives money and how much they will receive. For example, it could specify that young children receive payments from the trust once they reach a certain age. It can also specify that they receive a certain amount in the early years and a greater amount later (or vice versa).

A settlor may choose to create a family testamentary trust, instead of separate trusts, if they suspect that one beneficiary may need more support over time than other beneficiaries. Such an arrangement can allow the trustee more discretion in how funds are used for the benefit of the beneficiaries.

Disadvantages of a Testamentary Trust

Assets held in a previously established trust transfer to the trust beneficiaries immediately upon the death of the settlor. Trusts generally avoid the probate process.

A will must go through the probate process. The testamentary trust will come into effect upon the completion of probate, which can be time-consuming and can expose assets to estate tax.

Creating a Testamentary Trust in a Will

A testamentary trust is not automatically created upon the settlor's death. The first legal document to take effect is the last will and testament. The testamentary trust must be contained in the settlor's final will.

To create a testamentary trust, the settlor must designate a trustee (and possibly successor trustees) as well as beneficiaries of the trust. The document that creates the trust should also state which assets will enter the trust — real estate, life insurance proceeds, bank accounts, all assets of the estate, etc.

During the probate process, the provisions of the trust are reviewed by all parties. The executor of the will transfers assets into a trust fund. Then the trustee manages the trust assets until the trust terminates.

The trustee may be required to report to the probate court on a regular schedule to satisfy the court that trust funds are being handled in accordance with the will and state law.

Example of a Testamentary Trust at Work

Jim has a 3-year-old daughter, Amy, and he wants her to receive his assets after he dies. In his will, he states that he is creating a testamentary trust. He designates his brother, Bob, as the initial trustee and his mother as a successor trustee. The trust document specified in the will says that Bob will manage the trust property and assets for the benefit of Amy until she reaches the age of 21. Bob will give Amy a monthly income for education and expenses. When she turns 21, she will receive the remaining assets and the trust will terminate.

Understand Your Trust Options

Sometimes, a testamentary trust is an efficient way to distribute assets to the next generation. If you are considering ways to transfer property to loved ones, understand your options and the pros and cons of each type of trust. Talk to an experienced local estate planning lawyer.