What Is a Testamentary Trust?

POSTED ON: August 12, 2021

If you are drawing up your will and want to leave money to a minor child, using a testamentary trust is one way to do so. This legal document can also be beneficial in other situations, such as if you want to leave an inheritance to someone but aren’t sure they will use the gift wisely.

What Is a Testamentary Trust?

Trusts are created to hold assets, and money in a trust is managed according to the instructions of the person who created it. A testamentary trust is a trust that’s created by a “testament” in your will after death, explains WTOP’s article entitled “What Is a Testamentary Trust and How Do I Create One?” Hence the phrase “testamentary trust.”  Once the trust has been created (at death), assets are placed into it through the probate process, and then distributed, as designated by the terms of the trust.

This is contrasted with an “intervivos” trust, or “living trust”.  An intervivos trust (a living trust) is a trust created during life, and is generally meant to be funded during life as well.  In other words, instead of going through the probate process, the assets in an intervivos trust are put in it now, so that this does not have to be done after death.

Many intervivos trusts are “revocable trusts”.  A revocable trust is a living trust created prior to a person’s death. A revocable trust is created outside of probate, which means that the heirs do not have to go through probate to receive assets from a living trust. Instead, a trustee can distribute funds directly to beneficiaries after death. Both testamentary trusts and living trusts are used for estate planning. However, a living trust can allows for more flexibility and can have lower long-term costs. Living trusts are not only created outside probate but managed outside the court system as well. In contrast, testamentary trusts are funded and administered through the probate process.

A testamentary trust is frequently used to manage money for minor children, but it can protect assets in other situations too. The good thing is that there is a lot more court oversight. The bad part is court oversight may not be cheap.  I most often recommend testametary trusts to clients whose estate plan calls for a trust for asset protection purposes, but the plan has to remain flexible.  Also, if the client would prefer not to go through the funding process now (whcih means it might be somewhat less expensive now), a testamentary trust may be the way to go.

For example, a testamentary trust could be used to manage money for an 8-year-old beneficiary until age 25.  So, while testamentary trusts may be less expensive than living trusts to set up, they could cost more in the long run. It just depends on the situation.  Some intervivos living trusts are structured to have the same type of a payout plan after death, and can serve virtually the same purposes.

You should ask an attorney to draft the documents. It should be an attorney who specializes in trusts and estates. In fact, your best option is an attorney that is Board Certified in Estate Planning and Administration by the Louisiana Board of Legal Specialization.  Having a good estate planning attorney draw up will and trust documents will make certain that they meet the state’s requirements and are written so that your assets are distributed according to your instructions.

To read other articles addressing senior issues, read these articles: FEMA Helps with COVID-Related Funeral Costs and Can a Person with Alzheimer’s Sign Legal Documents? and What’s the Best Thing to Do with an Inherited House? and How Does an Inherited IRA or 401(k) Work?

If you want to discuss which type of trust is the best option for you, BOOK A CALL with Ted Vicknair to discuss protecting your assets for your children and grandchildren.

Reference: WTOP (July 19, 2021) “What Is a Testamentary Trust and How Do I Create One?”

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