Definition
A Testamentary Trust refers to a legal and fiduciary relationship put in motion through specific instructions in an individual’s will. Upon the individual’s death, certain assets are transferred into the trust which is then administered by a trustee. The trustee manages the assets for the beneficiaries as per the deceased’s wishes outlined in their will.
Key Takeaways
- A Testamentary Trust is a type of legal arrangement that is created by an individual’s will after they pass away. It details how the deceased’s assets will be distributed and managed.
- This type of trust is under the supervision of a probate court, and doesn’t come into effect until after the death of the trust’s creator. This means it can be changed or revoked at any time during the trustor’s lifetime.
- Unlike Living Trusts, Testamentary Trusts don’t offer the same level of privacy. All wills and associated Testamentary Trusts become public record after being processed by a probate court. This means that the way assets are distributed after the trustor’s death is open to public scrutiny.
Importance
A Testamentary Trust is a critical financial term and tool, particularly in estate planning. It’s importance primarily lies in the peace of mind and control it gives an individual over their assets after their demise.
This type of trust is highlighted in a person’s will and only takes effect after they die, enabling them to manage and distribute their assets according to their wishes. Testamentary Trusts also provide some level of protection to beneficiaries, who might not be prepared or able to manage large sums of money; the trust can set conditions for asset disbursement.
Furthermore, with a testamentary trust, estate taxes may be reduced or deferred, contributing to preserving the estate’s value. Being aware of this term and its implications can significantly impact an individual’s approach to asset management, inheritance, and overall financial planning.
Explanation
A Testamentary Trust is primarily used as an estate planning tool that offers a degree of control over the distribution of assets after the trustor’s death. It serves the purpose of protecting the interests of heirs, especially those considered legally incapable of managing their own finances such as minor children or individuals with special needs.
When the trustor passes away, the trust becomes active, and the named trustee takes over the management of the trust assets, ensuring they are distributed or used according to the stipulations outlined in the trust. The Testamentary Trust is typically employed when the trustor wants to stipulate certain conditions around how and when the heirs receive their inheritance.
For instance, the trust could specify that a beneficiary can only access their inheritance once they reach a certain age or achieve a particular milestone like graduating from college. It can also provide for staggered distribution over time to prevent the beneficiary from squandering all the inheritance at once.
Testamentary Trusts therefore provide an efficient mechanism not just for transferring wealth posthumously, but also for managing that wealth in a way that aligns with the trustor’s wishes.
Examples of Testamentary Trust
Grandparents Estate & Inheritance: Let’s assume that two grandparents want to ensure that their funds are used wisely when they pass. They have several grandchildren who they expect will be minors when they inherit. They set up a Testamentary Trust in their will, which will only be activated after both grandparents have passed. The trust specifies that the money should be used for their grandchildren’s education, basic needs, and other specified circumstances. This way, they ensure the younger grandchildren do not squander their inheritance, having it managed by a trustworthy trustee until they reach an age the grandparents deemed appropriate for them to receive control over their funds.
Protection against Legal Cases: A successful businesswoman, after her long-professional career, wants to protect her acquired assets from potential legal adversaries or creditors. She creates a Testamentary Trust in her will that activates upon her death putting the assets into that trust. This helps shield the assets from likely legal disputes or creditors, as trust assets are generally not considered part of the deceased’s estate.
Caring for a Disabled Child: A couple has a child with special needs, who will need lifetime support and care. They set up a Testamentary Trust in their will, stipulating that the funds will be used for the welfare, care and support of the child. The couple appoint a responsible and reliable trustee who will manage the allocated assets for the child’s needs after they have passed, ensuring their child would be taken care of financially.
FAQs about Testamentary Trust
What is a Testamentary Trust?
A Testamentary Trust, also known as a Will Trust, is a trust that is created upon a person’s death, as outlined in that person’s will. It does not come into effect until the person dies.
What is the main purpose of a Testamentary Trust?
The primary purpose of a Testamentary Trust is to provide a degree of control over how and when the assets in the trust are distributed to the beneficiaries. It can be particularly valuable when the beneficiaries are minor or are not familiar with money management.
Who controls a Testamentary Trust?
A Testamentary Trust is controlled by a trustee. The trustee is appointed by the deceased in their will. The trustee is responsible for managing the trust’s assets and distributing them to the beneficiaries according to the terms of the trust.
What are the advantages of a Testamentary Trust?
Testamentary Trusts offer several advantages. These include protection of assets, providing for minors or disabled beneficiaries, potential tax benefits, and assurance that the deceased’s wishes will be carried out.
What are the disadvantages of a Testamentary Trust?
Some disadvantages of Testamentary Trusts include the cost and time involved in setting them up and administering them, the fact that they become public record, and the potential for conflict among beneficiaries or between beneficiaries and the trustee.
Related Entrepreneurship Terms
- Will: A legal document by which a person, the testator, expresses how his or her estate should be distributed at death.
- Beneficiary: A person who is entitled to receive the benefits or proceeds of a will or trust.
- Trustee: An individual, corporation, or association holding assets for another party, typically for the benefit of third parties (beneficiaries).
- Estate: All the money and property owned by a particular person at the time of death, over which testamentary trust exercises control.
- Probate: The legal process wherein a will is reviewed to determine whether it is valid and authentic.
Sources for More Information
- Investopedia – This site provides information on almost every topic related to finance, including Testamentary Trust.
- LegalZoom – This website offers various legal documents and advice, including information on Testamentary Trusts.
- Nolo – Nolo has comprehensive and straightforward articles on a range of legal subjects, including estate planning and Testamentary Trusts.
- Fidelity – Fidelity offers financial resources and services, and it includes Testamentary Trusts in its informational resources.
