Testamentary Trusts

There are many varieties of trust available for use in estate planning. A majority of these trusts are established while the grantor is still alive. However one particular type of trust, the testamentary trust,  is created in a will. Therefore, the trust only becomes effective upon your death, and its conditions are established in a last will and testament. Fundamentally a testamentary trust does not differ functionally from other types of trusts; however, this type of trust offers a wider range of benefits for estate planners.
Testamentary trusts rely on the same format as other trusts whereby the individual who creates the trust, referred to as a grantor, places assets in a trust for an individual who receives the benefit from the trust (the beneficiary). The trustee, a person or legal entity, holds legal title to the assets for the future benefit of beneficiaries and handles managing the assets, according to the terms of the trust. However the main difference here is that the terms of the trust are detailed in the grantor’s will and are contingent upon the death of the grantor.
Testamentary trusts can be structured in some different ways to suit unique circumstances. Two of the more popular forms are spousal testamentary trusts and testamentary special needs trust.

Spousal Testamentary Trust

A testamentary spousal trust can be used to provide support for a surviving spouse or common-law partner. This type of trust can also be structured so as to pass on any remaining assets to the children of the deceased grantor. Like other testamentary trusts, a  spousal testamentary trust is written into the testator's will.  
Testamentary Special Needs Trust
A testamentary special needs trust is put in place when a disabled person’s guardian or caretaker passes away, thus allowing the disabled person to receive financial support from an inheritance incrementally over time. The testator establishes the trust in his or her will. Just as in other trust arrangements a variety of assets, such as cash, stocks, bonds, and real estate can be placed into a trust, to provide ongoing support for a disabled person.

Benefits of a Testamentary Trust

Testamentary trusts offer tax benefits, probate avoidance, protection from creditors and preservation of entitlement based benefits for disabled beneficiaries.

Tax Benefits

A testamentary trust offers tax benefits, particularly when the testator’s estate is placed in trust, beneficiaries who are minors and spouses can avoid or defer estate tax penalties. Given the fact that the current tax code imposes a tax on gifts that heirs and beneficiaries receive from an estate and imposes a tax on estates that reach a certain dollar amount, placing estate assets in a testamentary trust can shield these assets from tax liability. Also, it can provide tax savings to beneficiaries who, through a traditional inheritance, may be subject to tax penalties.  

Avoiding Probate

A trust created by a will does not require continuing supervision by a probate court. Avoiding probate can streamline the estate distribution process and ultimately reduce probate related costs. In addition to savings in costs, shielding assets from the probate process also allows for immediate distribution without court approval.

Protection from Creditors

Another advantage found in a testamentary trust is that assets placed in trust are protected from creditors. If an estate is subject to numerous claims from creditors, beneficiaries can still receive the full benefit of trust assets.
As referred to above, testamentary trust assets are excluded from the probate process. Therefore, creditors who may file a claim against the estate are unable to challenge their distribution. Further, if the estate is subject to a will contest, trust assets will not be tied to this process.

Taking Care of a Beneficiary

One of the primary benefits from a  testamentary special needs trust involves enabling a disabled person to receive financial support without losing or reducing their benefits from means-tested or disability-based programs. Often when dependents receive an inheritance, they are unable to manage their funds. A testamentary trust can provide long-term individual planning for a disabled dependent even after the guardian or caretaker’s death.
Furthermore, a disabled dependent is protected if they are unable to hold large amounts of assets due to receiving benefits from means-tested programs that impose countable resource limits on beneficiaries. In this context, a special needs trust serves as a way to set money aside for the beneficiary without counting against countable resource limits.

Testatmentary Trust Attorney

A testamentary trust attorney can provide legal advice regarding creating a will with testamentary trust and administering a testamentary trust. Additionally a testamentary trust attorney provides the trust maker with a clear overview of living trusts legal, financial and tax implications. A living trust attorney can offer an evaluation as to whether a testamentary trust is an appropriate estate planning tool.