A testamentary trust is the type of trust established after a person dies. It is established per the terms laid out in the decedent’s will. It can also be used as a way of having greater control over how assets will be managed. A testamentary trust does not exist until the decedent’s will is probated in court.
How Does a Testamentary Trust Work?
If the will does not fulfill certain formalities, such as being in writing and signed by the testator in front of two or more competent witnesses, it can be contested due to lack of formality. A will can be also declared void if the testator is declared mentally incapacitated due to a previously diagnosed condition, such as dementia.
Another reason for a will contest is when the will is written under undue influence—when a child, spouse, or even a caregiver threatens or pressures the testator to change the estate plans in their favor. Finally, a will can be revoked directly by the testator.
What Type of Testamentary Trusts Can I Create?
The type of trust you create depends on your objective for the assets you place in it. You may create a family trust to hold assets for your family or a spousal testamentary trust that can hold assets solely for your surviving spouse. You can also create a trust to hold assets meant for a beneficiary who is disabled or has special needs. This is often referred to as aspecial needs trust. The key difference to remember is that all of the types of trust mentioned above can be created during a trustor’s lifetime and be revocable, but when these trusts are created as testamentary trusts, they are irrevocable, meaning they cannot be changed or canceled once created.
What are the Advantages and Disadvantages of a Testamentary Trust?
A testamentary trust gives you greater control over your assets and how they will be spent by your beneficiaries. This is especially favorable if, for example, you have a child who may be immature or irresponsible towards financial matters because you can determine how the money will be spent and when, thus avoiding the risk of your life’s savings being spent frivolously. A testamentary trust may also be cheaper to set up because it is created as part of your will and only exists on paper and does not require any management or administration until the will is probated and the trust created. This type of trust can also protect beneficiaries from losing your estate assets to creditors because creditors cannot collect money from the trust.
There may also be disadvantages in creating a testamentary trust. While it protects your beneficiaries from creditor claims, it does not protect you or your estate as the grantor, since creditors can demand that debts be repaid before assets are placed into the testamentary trust. There may also be fewer tax advantages as a testamentary trust does not help avoid estate taxes or income taxes. Finally, while most trusts do not require probate before distributing assets, a testamentary trust must go through probate before even being created. If you have questions about setting up your will or a testamentary trust, call Oren Ross & Associates at (678) 250-4281.
