How Does a Testamentary Trust Work?
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What Is a Testamentary Trust?
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A trust is a legal arrangement by which one person or group manages property for another. They have considerable flexibility in the types of assets they can manage and how those assets can be disposed of. A testamentary trust is created by the terms of a will, so the grantor, the one whose real estate, cash or other assets are assigned to the trust, will be deceased. It becomes the trustee's responsibility to manage and dispense of the trust assets for the beneficiary or beneficiaries designated in the will.
Establishing the Trust
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Because a will does not become active until the death of the testator (the person making the will), the trust does not exist until his death either. And because a testamentary trust is created by a will, it falls under the jurisdiction of a probate court. Moving a case through probate, however, can be both time-consuming and expensive, with the court costs and legal fees deducted directly from the trust. For this reason testamentary trusts are usually only created by a testator when there are preexisting assets of significant value in question or a large life insurance settlement due on their death. Dispensing of assets in a testamentary trust can take years and require periodic review by the probate court. If the trustee designated in the will is unable or unwilling to assume responsibility for the trust, a friend or relative can volunteer to serve as trustee or one can be appointed by the probate court. The court-appointed trustee will be eligible to receive fees from the trust and their authority will be very broad unless explicitly limited by the terms of the will.
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Testamentary Trust vs. Revocable Living Trust
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Individuals with means to do so are often advised by attorneys to establish a revocable living trust rather than a testamentary trust. This process accepts substantial legal fees upfront in establishing the trust before the grantor's death in order to bypass probate later on. In a revocable living trust, the grantor transfers title of her assets to the trust and names herself as trustee, therefore maintaining control over the assets. Upon her death, the successor trustee assumes control of the trust and manages its assets for the beneficiaries. A revocable living trust can also offer tax benefits by expanding exemptions to the federal estate tax.
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