How do I provide a Testamentary Trust?

A testamentary trust is often referred to as a will trust, it is basically a trust within a will. A testamentary trust allows you to protect any estate accumulated during the testator’s lifetime or created as a result of the testator’s death, and the testamentary trust can be created to oversee these assets. But what does a testamentary trust entails and how does one provide for one?

What is a testamentary trust?

A testamentary trust is a trust that arises upon death of the testator, who is specified in the will. The will allow you to protect your estate from bankruptcy, provides taxation benefits to your nominated beneficiaries and allows you to determine exactly who gets what. A testamentary trust may contain more than one beneficiary, therefore often regarded as ideal when you have children from previous marriages. Moreover, the trust may address all or part to the testator’s estate.

An example of a testamentary trust is: “The residue of my estate shall form the corpus (body) of a trust, with the executor as trustee, for my children’s health and education, which shall terminate when the last child attains the age of 25, when the remaining corpus and any accumulated profits shall be divided among my then living children.” One has to distinguish between a testamentary trust and an inter vivos trust. An inter vivos trust is living trust which commences at the time of writing while the trustor is still alive.

Which parties are involved?

There are four parties involved in a testamentary trust. Firstly, the testamentary trust is drawn up by a testator or donor. The testator specifies that the trust is created, usually as part of the will that can be set up in abeyance during the testator’s lifetime. There are several names for the testator such as grantor or trustor, but mostly this party is called the settler. The testator may leave a letter of wishes for the appointed trustee.

Secondly, a trustee is appointed through the testamentary trust, if not specified in the will a probate court will appoint a trustee. The trustee is responsible to carry out the terms of the will and appointed to direct the trust until the set time the trust expires. A trustee can be named in the will, but has no legal obligation to accept. When appointing the trustee, make sure that the person is prepared to oversee the trust for its provision.

Thirdly, the beneficiary or beneficiaries are those that receive the benefits of the trust. Mostly, the trust will expire once the beneficiaries have reached a certain age, educational goal or matrimonial status. Finally, even though not officially part of the testamentary trust, a probate court will be involved. The probate court oversees the trustee’s handling of the trust.

Advantages & Disadvantages?

One advantage of a testamentary trust is that it provides a means for assets to assigned to minor children to be protected until the children are capable of managing these assets. Moreover, a testamentary trust entails low upfront costs, usually only the costs of preparing the will to address the trust and the fees included with the probate court.

However, a testamentary trust also involves some disadvantages. For instance, the trustee is required to regularly meet with the probate court, in most jurisdictions at least annually. The trustee must prove that the trust is handles in a responsible manner. The trustee may encounter some emotional attachment and legal liability when handling the trust. Another disadvantage of the testamentary trust is that it can be difficult for beneficiaries to bring a dishonest trustee to account. Moreover, the handling of the trust might involve significant legal fees, which are deducted from the principal of the estate.

All in all, a testamentary trust might be better than an inter vivos trust if the expected estate is small as compared to potential life-insurance settlement accounts. And, since you are able to set up multiple trusts to provide for your loved ones, it is ideal when there are children from previous marriages.