What Is a Testamentary Trust?
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A testamentary trust is a type of trust created by the terms of your will. Unlike other trusts, it's only funded upon your death. It can help you control the distribution of your assets to your children and other beneficiaries after your death.
You can include multiple testamentary trusts in your will, including for charitable donations. This setup can help you combine the advantages of both wills and trusts by ensuring the assets in your will get distributed according to your wishes.
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A testamentary trust is less costly upfront than other trusts since it's not activated until after your death. Like other trusts, it can be a helpful estate planning tool if you have minor children who can't directly receive your assets until they come of age. Trusts may also help reduce estate tax liabilities.
However, a testamentary trust may be more complicated for your beneficiaries. They must go through the probate process to verify the will before it can take effect, which can delay the distribution of your assets. On the other hand, a living trust, which takes effect during your life, bypasses probate and may give you more control.
Pros and cons of a testamentary trust
Assets can be distributed to minor children until they come of age.
You can change the terms of the trust as long as you're still alive.
Low upfront cost since the trust isn't created until you die.
Must pass through the probate process, which can be costly and time-consuming.
The terms of the trust can't be changed after your death.
Trustees must meet with the probate court every year until the trust expires.
How does a testamentary trust work?
The instructions for a testamentary trust are included in your will. The grantor — the creator of the will and trust — appoints a trustee (also called an executor) to manage the assets until the beneficiary meets the requirements to receive the full inheritance.
Upon your death, your will must pass through the probate process before the trust can take effect. There is no limit to the number of trusts a grantor can set up, but there are three common options:
Separate trusts. A trust is created for each beneficiary and assets are divided equally among children.
Family pot trusts. Assets are distributed based on the needs of each beneficiary, which can be a good option if a child has functional needs or requires more financial support.
Charitable remainder trusts. These can be set up to distribute assets to a chosen charity after death.
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How do you set up a testamentary trust?
It's best to work with an estate planning lawyer to ensure your testamentary trust complies with your state laws and can pass through probate as smoothly as possible. You'll need to establish the following:
A will. All of the information for a testamentary trust is contained in a will. This includes naming the trustee and the beneficiary and detailing which assets should be placed in the trust. You may also want to include distribution instructions, including how the assets should be allocated over time and when the trust should expire.
A trustee or executor. The activation of a testamentary trust happens after your death. At this point, your trustee or will executor is responsible for the probate process and the distribution of your assets once it's complete. If minor children are involved, the trustee must return to probate court every year to verify that the assets are still being distributed correctly.
You'll need to execute a new will to change the terms of a testamentary trust.
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Since a testamentary trust is its own financial entity, it is subject to its own taxes. If it earns $600 or more in annual income, it must file a U.S. Income Tax Return for Estates and Trusts (Form 1041).
However, like other trusts, testamentary trusts can't be taxed twice, meaning your beneficiaries won't have to pay taxes on the assets they receive from the trust. And since the terms of a testamentary trust are permanent once it's activated, the assets can't be moved and won't be subject to additional taxes.