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What is a Testamentary Trust?

Estate Planners | Monday, April 11th, 2011

The testamentary trust is a trust that is often created when a parent’s potential death might trigger the distributions of large sums of money, like life insurance policy proceeds, to minor children or young adult children. This type of trust often allows for a child to become more mature before being tasked with the responsibility of handling a lot of money. A testamentary trust goes into effect after the death of the parent’s have passed away, and will involve the appointment of a trustee who will manage the money in the trust until a particular point in time when the trust is set to expire. This is typically when the trust’s beneficiaries reach a certain age, like twenty-five, or when they finish college. Setting up a testamentary trust is typically not that expensive.

Benefits of Testamentary Trust

Many times, individuals choose to create this type of trust to protect their minor children or a loved one with a disability who will inherit a large sum of money when the individual passes away. Depending on the period of time that the trustee must act for the trust, the trustee will have to go to probate court and have the trust monitored by the court. Due to this fact, the testamentary trust can become costly over time, especially when compared to a revocable living will. Further, if the trustee requires legal advice on the administration of the testamentary trust, these legal fees are typically deducted from the trust itself, which means that less money is available for the beneficiary when the trust expires.

A Word about Choosing a Trustee

It is important to keep in mind that creating a testamentary trust also means appointing a trustee for the trust. Choosing the right person is important, and discussing the prospect with them before the creation of the trust is equally as crucial. Some people may refuse to act as trustees, and in this instance, the court will appoint a trustee, or a friend or relative may volunteer to become the trustee. The better alternative is to discuss the matter with a trustworthy family member or other individual before the trust is drawn up to make sure that they are willing to stand as trustee upon your death. Even though the court oversees the trustee, it is always in the best interest of the beneficiary to choose someone that you know to be honest and of high character, as they will be essentially in control of the testamentary trust until the child reaches the age or other stipulation indicated in the trust.

Weighing Your Options

Most attorneys and financial or estate planners typically advise against the creation of a testamentary trust and suggest, instead, that a revocable living will be drafted instead. Nonetheless, if both parents or even a single parent has a substantial amount of life insurance that would be payable upon their death, the testamentary trust may be the best way to dictate terms for providing for their children if they were to pass away unexpectedly. To determine which type of trust is best in your situation, contact a qualified estate planner in your area.

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