What Is A Testamentary Trust?
First, we need to briefly define what a trust is. A trust is created when someone (often referred to as the grantor or trustor) transfers the legal title of property to a trustee to hold and administer for the benefit of the beneficiary. A trust can also be created after someone’s death via their will. This is called a testamentary trust.
A testamentary trust is an irrevocable trust created when a person dies and whose terms are spelled out in their will. While trusts are normally created when the grantor is still alive, a testamentary trust is drafted when alive, but it doesn’t come into existence until the grantor’s death.
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How a Testamentary Trust Is Created
Before their demise, the grantor will determine the terms of the trust and how they want their assets to be held in trust. The terms of the trust will be included in the grantor’s will. During the estate administration, the trust will then come into existence once the personal representative gives the trustee the assets. The governing document can be simple or complex. It can create a dynastic trust or a simple trust which distributes when the beneficiary reaches a certain age; similar to a conservatorship.
Example of a Testamentary Trust
A common testamentary trust is for a parent to provide for their child to receive their inheritance in tranches. For example, in a testamentary trust a mother might specify in her will that when she dies, her assets will be held in trust and managed for the benefit of her child until they reach the age of 25, 30, and 35. Upon reaching those ages, ⅓ of the assets will be distributed to the child.
5 Benefits Of a Testamentary Trust
- Flexibility– A testamentary trust is easily changed by updating one’s will. This lets someone change the terms of the trust and how and when they want their assets to be distributed.
- Protection — The grantor can establish a trust to protect the assets left to a beneficiary in the case of divorce, bankruptcy or tort liability.
- Lower Cost — Because testamentary trusts do not need to be funded during life, it costs less to create a testamentary trust than a revocable living trust.
- Taxes — Testamentary trusts allow for advanced estate and income tax planning choices to be incorporated into the plan.
- Easy to Administer – Because the assets which will go into the trust remain owned by the grantor until death, there are no ongoing administrative costs associated with establishing a testamentary trust in your will.
Some people set up trusts with a bank or other financial institution as the trustee, but a testamentary trust may also be established with a family member as the trustee to reduce costs. An experienced trusts and estates attorney will be able to guide you through the choice.
Testamentary trusts can be a useful instrument for effective estate planning. Please call or email our estate planning attorneys at Copper State Planning in Phoenix, Arizona so we can schedule your initial consultation, 480-442-6413
