Testamentary Trusts

A testamentary trust is one of the most well-known and widely used trusts. It comes into effect after a settlor has passed away and has its specific benefits and features. Keep reading to learn more.

What is the Definition of a Testamentary Trust?

A testamentary trust is outlined in a person’s last will and testament. The estate’s executor creates it upon the death of the grantor after the probate process has been completed. This trust might contain the deceased’s assets as well as a payout from any life insurance policy which would have been held by the person establishing the trust if the insurance proceeds were paid to the estate.

A testamentary trust can only be created at the behest of a deceased person’s will or through the court. It can not be created during a person’s lifetime. This would instead be considered a “living trust.”

There may be more than one testamentary trust within one will, and they serve different purposes. A testamentary trust can be created for the benefit of a parents’ young children to last till a set expiry date. For example, this can be when the beneficiary turns a certain age or unlocks a milestone like going to college or getting married.

Alternatively, a testamentary trust may be created for the benefit of a disabled person, to make sure they receive the proper care when their caregiver passes away. Otherwise, pet lovers create testamentary trusts to take care of their pets.

Parties Involved in Testamentary Trusts

Three parties are involved in creating a valid testamentary trust: the grantor or grantor, trustee, and beneficiary. Although you can appoint one and the same person to act as your trustee for the trust and executor for the will, you can still have one person as the trustee, and another as the executor, because these two roles are different, and it is important not to confuse them.

The grantor is also known as the trustor or settlor and is the person who funds the trust and lays out their intentions to set it up. The trust comes to light upon this individual’s death, and the process begins after the court has validated the will during the probate process.

The trustee distributes the property as stated by the trust and ensures that the rights are protected for the beneficiary. This can be more than one person or even someone known to the testator. This is different from the executor.

An executor is someone appointed in the will to manage the deceased’s estate. On the other hand, an estate trustee runs the trusts created by the deceased in the will.

The final party involved is the beneficiary. This is someone who benefits from the trust under specific rules or conditions. This can be anyone that the testator would want to benefit from the trust.

Who Can Benefit from a Testamentary Trust?

A testamentary trust is appropriate for anyone who wants to bestow assets to their beneficiaries after death. However, there are some scenarios where we see this type of trust taken advantage of more often than others.

Anyone with minor children, especially those in high-risk professions, such as a firefighter or military personnel, might want to consider this type of trust. This allows them to schedule trust payouts according to certain conditions. This is also beneficial if a child has disabilities or addictions that must be accounted for.

Another scenario might be if your beneficiary, such as a spouse, has a business in which negligence claims are likely. It might be in their best interest to have assets held in a trust so the courts or creditors can not take them.

There are also attractive benefits for blended families. For example, when it comes to a blended family, a testamentary trust will be able to provide for the surviving spouse and then pass on assets to the children of that spouse or both children.

Suppose a grantor has a child who has divorced parents. In that case, a testamentary trust can effectively ensure that the child receives those funds. If they are not held in trust, the Family Court might order the distribution of those assets.

Responsibilities of a Testamentary Trust Trustee

There are no specific requirements for choosing a trustee. It can be anyone that the grantor decides to trust with the responsibility. However, there are specific responsibilities that the trustee must fulfill.

First, there must be clear protection of the rights of the beneficiary. The trustee must not act in any way to unjustly enrich any party. If necessary, they must also take safety measures with investments and file tax returns.

A payment timeframe and certain limits must be set while establishing the trust. This is necessary to ensure proper distribution and care for the beneficiaries. The trustee has the right to decline this role, and the court can appoint someone else if there is no contingent trustee in place.

What is the Role of the Probate Court in a Testamentary Trust?

When someone passes away, a last will and testament must go through the probate process. The probate court (aka surrogate court) gives formal recognition to the will and confirms the appointment of an executor. This process is usually undertaken by an experienced legal professional.

After this, the executor will work with the assigned trustee to create the trust. Many testamentary trusts include specific provisions that set out when the trust is to terminate, and some or all the stated beneficiaries may receive their allocated share outright (e.g., upon marriage or reaching a certain age).

How is a Testamentary Trust Created?

A testamentary trust is laid out in a person’s last will and testament. Therefore, it is essential that the grantor creates a legally binding will. This can come in many forms, but to ensure there are no misinterpretations in the probate court, the will should be set up with an estate planning lawyer specialised in this area of law.

When Does a Trust Expire?

Typically, a testamentary trust will cease once the beneficiaries receive all the assets. The expiration date may also depend on the terms; sometimes, it is linked to a special occasion. For example, until a certain age or until the beneficiary gets married, etc.

How Do Living and Testamentary Trusts Differ?

A testamentary trust only comes into existence upon the grantor’s death as the will is brought to light. Conversely, a living trust is established during a person’s lifetime.

In a testamentary trust, instructions may be given during the grantor’s lifetime; however, the trust itself does not come into existence until after their death. A living (inter vivos) trust allows the testator to play a more active role since they are alive during the creation of the trust and can oversee the execution of their wishes.

Moreover, a living trust can usually be revoked at any time as the grantor can make changes as they wish; however, a testamentary trust is irrevocable and cannot be changed.

Specialized Types of Testamentary Trusts

There are some scenarios where specialized testamentary trusts exist. These include:

1. Lifetime benefit trusts for dependent beneficiaries with special needs or mental infirmity. They usually last for the lifetime of a beneficiary and protect the assets within the trust to ensure the beneficiary receives adequate maintenance. This type of trust can also be used to ensure the beneficiary keeps receiving governmental financial assistance despite the financial support left to them by the settlor.
2. Spousal or common-law partner trust: is designed to provide support for elderly surviving partners. The beneficiary is the only person who can benefit from the trust during their lifetime.
3. Trusts for minor children: they usually exist to support minors till they reach a certain age, at which point the child receives the balance of their share outright.
4. Testamentary pet trusts are established to provide for a domestic pet after the owner passes.

Each of these specialized types of testamentary trusts has its unique features, requirements, and benefits. Consult an estate planning lawyer to see which is right for you. They will be able to design a testamentary trust to meet your specific needs.

Advantages of Creating a Testamentary Trust

There are many benefits of establishing testamentary trust. The primary purpose is to allow your assets to be distributed according to your wishes instead of giving them all at once. The trust goes through due process and time. This can allow a fair distribution of wealth amongst heirs and other beneficiaries without any issues, like accounting for minor children.

It also gives the grantor the freedom to change their mind during their lifetime. With a testamentary trust, the grantor can change his mind about any of the details of a trust while they are still alive.

Not everyone has the financial means to create a living trust and may choose to have a trust that only comes into existence after they pass away. This is also accompanied by the idea that any cost of creating a testamentary trust comes out of the deceased’s estate, and the cost of creating a trust during the lifetime is avoided.

There are certain tax advantages as well. Also, the trust amount for children can be designated for their education, welfare, etc., and does not need to be paid directly to them.

Disadvantages of Testamentary Trusts

Along with benefits, there may be some significant disadvantages of testamentary trusts. First, it is argued that with this type of trust, you can not avoid probate, and assets may have to be distributed through the court. The executor must go to court with the deceased’s will and prove that they are given the role of distributing assets under the trust.

This is an essential process for lawful distribution and takes several months for completion. Since the trust only comes into existence after the testator’s death, the probate process is started late, so the beneficiaries may not receive the property until a significant time has passed during the proceedings.

When a will goes through the probate court, there is a record of those assets in the public record. This is a marked disadvantage for some people, including those in the public eye.

Lastly, it may create confusion. The grantor is no longer alive to clear any doubts, and lack of clarity may cause problems in establishing the trust or result in family strife.

How are Testamentary Trusts Taxed?

This type of trust is a separate legal entity for tax purposes. Until recently, any income in the trust was taxed at graduated tax rates. This was considered a helpful tool and benefited individuals. However, this changed, and now most trusts are taxed at the highest applicable tax rate. Therefore, you will need to consult with a qualified tax advisor or accountant regarding the taxes applicable to your testamentary trust.

Testamentary Trusts For Estate Planning

Sometimes, the presence of a trust may be beneficial for your estate planning. There is control over who can benefit from the trust and how this may be done.

You can carry out this process yourself; however, the process is complex, and mistakes may cause undue stress on your loved ones. Therefore, seeking estate planning expert opinion from a legal professional is best. After choosing the beneficiaries for a trust, you may also want to consider a power of attorney and any guardianship plan to address proper management of your property, financial and personal matters in case of your mental infirmity.

If you think a testamentary trust might be right for you or are ready to incorporate it into your will, contact the estate planning lawyers at DLegal. They will provide legal counsel and include provisions for a testamentary trust while preparing your last will and testament.