What is a testamentary trust?

You can have your executor create a trust upon your death.

Elissa

Elissa Suh

Published November 17, 2020

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A testamentary trust is a trust created by the terms of a will. In addition to stating who should get your possessions and property when you die, a last will and testament can include instructions to establish a trust and what assets should be transferred into it. The testamentary trust only goes into effect after the writer of the will (also known as the testator) dies, which makes the testamentary trust irrevocable.

Testamentary trusts are easy to create and provide you with some control over how beneficiaries can use the assets they receive. They can be a useful tool in estate planning to pass an inheritance on to a child who is too young to manage the money or assets themselves. But because the trust assets don’t transfer into the trust while the trust maker (trustor) is still alive, the estate won’t avoid probate — which is one the primary reasons to open a trust in the first place.

How does a testamentary trust work?

A trust is a legal entity that you can transfer your money and property into for your future heirs. A testamentary trust is created through a will, which you can either get by asking an estate attorney to prepare one or through a will you create yourself. (With the Policygenius app, you can create a tailored will using attorney-approved tools, without the attorney price tag.)

In the will you should name an executor, or someone in charge of managing your estate once you’re dead. They will be responsible for opening the testamentary trust and transferring assets to it according to your instructions. You can also choose to create more than one testamentary trust. For example, you might create separate testamentary trusts for your children and spouse.

The testamentary trust provisions can be modified by updating your will, since the trust only exists on paper in the terms of your will. But once you pass away, the terms of the trust are irrevocable, meaning that they can't be changed (unless you explicitly directed your will to create a testamentary trust that allows for amendment after your death).

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Here are a few steps to take when creating a testamentary trust:

Name a trust beneficiary

Beneficiaries are the people or entities you choose to receive an inheritance. You can name a primary beneficiary and a contingent beneficiary as a backup.

Learn about beneficiaries in estate planning.

Designate a testamentary trustee

The most important part in creating a testamentary trust is to name a trustee, the person in charge of handling the trust. You'll want to choose someone that you can count on to manage the trust property and distribute it to your beneficiaries. You may even name a successor trustee who takes over if the trustee is unable to do so.

Read our guide to choosing a trustee.

List the trust property

State which of your assets should transfer (or pour over) into the trust. You don't need to transfer everything; you can still give away assets directly to beneficiaries through the will.

Related article: Should I put my house in a trust?

Types of testamentary trusts

Trusts are simply a way of passing on assets and they can be further broken down into different types, depending on your goals. A family trust holds property for your family, while a spousal testamentary trust holds assets just for a surviving spouse. If the trust is meant to help minimize your spouse’s future estate value, then it might be a bypass trust. If your testamentary trust holds an inheritance for a beneficiary with special needs, then you might have a special needs trust. Most types of trust that you want can be created as a testamentary trust. A more complex trust however may require you to work with an estate attorney.

Learn about all the different types of trusts and which one may be right for you.

Testamentary trust vs living trust

A living trust is created while the grantor is alive and it can be modified; a testamentary trust is created when the grantor dies, so it cannot be changed. Living trusts are revocable trusts, while testamentary trusts are irrevocable trusts).

Another difference is that a living trust offers more privacy because assets in the trust don’t go through probate. The details of the trust, like who the trust beneficiaries are, and what assets they receive — are shielded from the public. Provisions of a testamentary trust are contained within a will, which goes through probate and eventually becomes part of the public record.

Keeping probate matters private is just one of the key differences between a trust and will. Read more about living trusts vs wills and how they work together as part of your estate plan.

Benefits of a testamentary trust

A testamentary trust is generally best for someone who wants a simple trust for more control over how their assets are passed on to their beneficiaries.

More control over assets

In estate planning, testamentary trusts can be useful if you want to pass an inheritance on to a young child and provide guidelines on how the assets are used. For example, the trust beneficiary may not be able to access the money until they are a certain age, like the age of the majority.

Easy and cost-effective

Testamentary trusts are easier and cheaper to set up then other types of trusts since testamentary trusts simply require writing a will. Setting up a living trust during your lifetime could cost $1,000 or more, but writing a will is usually much cheaper. (Though you can now create a revocable trust and will in the Policygenius app for just $280).

Living trusts could be more expensive, since they are typically managed over the course of your lifetime. Living trusts may also have annual maintenance fees, which can be high if you choose a professional trustee, like an attorney or financial institution.

Asset protection

Testamentary trusts provide asset protection for trust beneficiaries, but not for the grantor. If you open a testamentary trust for your spendthrift son and he owes money, his creditors cannot collect money from the trust.

However, transferring everything into a testamentary trust upon your death will not prevent creditors from coming after your estate. They can petition the probate court seeking repayment for your debts before assets go into the trust.

Disadvantages of a testamentary trust

The drawbacks of testamentary trusts are that they may not help lower taxes or avoid probate.

Fewer tax benefits than other trusts

Because the assets are in the grantor's control until their death, creating a testamentary trust won't help minimize estate tax or income tax. You typically need to relinquish control of your assets ahead of time to take advantage of these tax benefits. Your estate may be able to receive tax deductions if the testamentary trust is a charitable trust, but it might take some planning or working with an attorney.

If you have concerns about what taxes your estate might owe, it could be a sign that you should get an estate planning attorney.

Doesn’t avoid probate court

One of the essential benefits of a trust is avoiding probate, the legal process of proving the validity of a will and settling the estate by distributing the deceased’s assets.

However, a testamentary trust doesn’t allow your beneficiaries to receive assets outside of probate, since the assets are still the property of the settlor at the time of death. (They haven't been transferred into the trust yet.) That means your executor must petition the court to prove the terms of your will before the trust can be established.

Probate can delay the time it takes for your beneficiaries to receive their inheritance. Learn more about the probate process and how to avoid it.

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Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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