Testamentary Trusts

The term “Testamentary Trust” refers to the way in which a trust is created.  A Testamentary Trust is designed in a Last Will and Testament, but does not actually come in to being unless and until the Will is probated and the condition for the trust’s activation have been met.  

By contrast, an “Inter-vivos Trust” is designed and made active during the trust maker’s life.  Sometimes this Inter-vivos Trust is designed to avoid probate or protect assets from creditors or long-term care costs.

Testamentary Trusts are commonly used when a Will leaves assets to a person who might not be ready or able to prudently manage the funds.  A common example is a provision where the Will directs that everything passes to the children, but if a child dies before the parent, then that pre-deceased child’s share passes down to their children (the Will maker’s grandchildren).  Without a testamentary trust, the Court will direct that estate proceeds benefiting a person under age 18 must be held in a restricted savings account controlled by the Court.  After reaching age 18, the beneficiary requests a simple Order from the Court lifting the restriction and the 18-year-old gets the cash outright and without restriction.  

You can readily see why this would not be ideal.  First, the cash is in a savings account, earning a minimal rate or return.  Second, the surviving parent of the beneficiary may formally request funds from the account, but will have to show the beneficiary has a significant need that cannot be otherwise met.  The Court decision-making is very conservative with an objective to keep the funds in the account.  Third, at age 18, the funds are released, unrestricted, to the beneficiary.  This is often a mistake, as the average 18-year-old does not have the foresight or experience to manage and invest the funds for the long-term.  Additionally, the outright ownership of these funds will affect and limit college student aide.  

With a testamentary trust, it can be specified in the Will that the beneficiary does not get cash outright until a later age, determined by the Will maker.  Additionally, the Trustee, who is chosen by the Will maker, may have wider latitude in conservative investment choices that will yield a greater return than a typical savings account.  The Trustee can be given tailored guidelines that trust funds may be used for the beneficiary in keeping with the Will maker’s beliefs and ultimate objectives, for example for college, extra-curricular activities and medical expenses, if the Trustee believes that is a good choice for the beneficiary.

In many cases these trust provisions are a “contingency”, for example if a beneficiary is under age 25 or 30.  I routinely use this contingency plan, and have found it critically helpful in a number of estates, as well as seen the converse difficulty where this contingency was not provided for.  Take a moment to consider how this might apply to your Will and hypothetical estate.

Law Office of Kathleen M Toombs PLLC

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