What is a testamentary trust?

A testamentary trust is a type of trust that becomes effective when the testator dies. This type of trust is often created so that minor children or young adults have money, such as life insurance funds, distributed to them when a parent dies. It is usually part of the tester's will. A testamentary trust involves appointing a trustee to look after the trust funds up to a point where the trust expires, such as when the child finishes college or turns 25. The initial cost of establishing a testamentary trust is usually very low.

Option often expensive

Depending on the number of years the trustee must serve for a testamentary trust, he or she will need to go to the probate court and have the trust examined regularly. For this reason, will funds can end up costing more in legal fees than revocable living wills. If a trustee needs frequent legal advice on how to administer the trust, this could mean a significant amount of attorney fees over time, which is usually deducted from the amount of the trust.

These costs are why many lawyers advise people to create revocable living wills rather than living trusts. On the other hand, if both parents or a single parent have a very high life insurance payout and little money on hand, a living trust can be beneficial. It may be the only method by which some people can dictate some terms to support their children if they suddenly die.

find an administrator

The creation of a testamentary trust also means that a person must act as trustee until the trust is terminated. Such a person may be named in a will, but some will not take the job as it may take too long. In the event that a trustee is not appointed, one may be appointed by the court, or an adult friend or relative of the testator may volunteer to act as trustee. Anyone intending to create a testamentary trust is advised to talk to friends and family about who will act as guardian and administrator in the event of death.

Before the children have a full disbursement of the trust funds, the money is administered by the appointed trustee, and this work is overseen by the probate courts. This should ensure that financial matters are handled properly, but choosing a trusted manager is recommended. Once the trustee is given responsibility for the money, control and the degree to which it can be spent on the care of the child or children may not be sufficiently controlled by a very brief or unspecified will. A will can override a person's wishes regarding the use of money, but the trustee, if the court agrees, need not necessarily honor those wishes.