What is a testamentary trust?
A testamentary trust is a trust created by a will that takes effect when the grantor ( the person who made the will) dies. This is pursuant to Florida State Statute 736.1106. The grantor of the will provides the directions for establishing the trust at the time the will is created. Although the will is active immediately upon completion, the trust is not actually created until the grantor has died and the estate has passed through probate.
A testamentary trust is structured the same and takes effect similar to general trusts. The primary distinction between a testamentary trust and other trusts is the manner in which the trust comes into existence.
What is the difference between a living trust and a testamentary trust?
A living trust (also known as an inter vivos trust) transfers ownership of property or other assets from a person(s) to the trust itself. A living trust starts during a person’s lifetime, immediately removing ownership from the individual so long as the trust was executed and funded properly. A testamentary trust is included in a Last Will and Testament but does not come into existence until after the grantor’s death. Ownership of any assets devoted to the trust may remain within the legal possession of the grantor throughout their life. The property or assets dedicated to the trust transfer into the trust after the estate has cleared probate.
Why should you include a testamentary trust in your estate plan?
A testamentary trust is a useful feature that can benefit individuals planning their estate for various reasons. First, not everyone possesses many assets when they begin estate planning and may not need to create a typical trust. The biggest assets for most young adults is their life insurance policy. That being said, a testamentary trust can simply include the payout for a life insurance policy after the grantor has passed away. This would allow the beneficiary to access the trust and would provide protection from their creditors or future claims against them individually. If the money was given outright to a beneficiary instead of put in a trust, this money could be subject to existing or future creditors such as in personal debt situations, liability payouts for an accident, or other similar circumstances where a third party is owed money. An example would be if a spouse dies and leaves everything to their significant other; If the surviving spouse is the defendant to a lawsuit, the assets in the trust can be protected because they are owned by the trust and not the individual directly.
Another reason to use a testamentary trust is for the benefit of minor children or disabled persons who are not fully able to manage their own finances. The grantor can appoint a trustee to administer the trust in the interests of the beneficiaries. The trust can establish time-release features to provide funds upon milestone ages or achievements such as a 25th birthday or upon graduating from college. Additionally, the trust can do much more such as allowing distributions only for specific expenditures. For a better understanding of trusts please see our trusts section.
You should seek advice from an estate planning attorney if you have a will but aren’t sure about a testamentary trust. This can provide an enormous amount of protection to your assets and your heirs’ future interest.