A testamentary trust is a type of trust that is put into effect when the testator dies. This type of trust is often created for children who are minors or young adults so that money, such as life insurance funds, will be distributed to them when a parent dies. It typically is part of the testator's will. A testamentary trust involves appointing a trustee to look after the funds in the trust until a given point when the trust expires, such as when the child finishes college or turns 25 years old. The upfront cost of setting up a testamentary trust is usually very low.
Often-Expensive Option
Depending on the number of years for which the trustee must act for a testamentary trust, he or she will need to go to probate court and have the trust examined on a regular basis. For this reason, testamentary trusts can end up costing more in legal fees than revocable living wills would cost. If a trustee needs frequent legal advice on how to administer the trust, this can mean a significant amount of legal fees over time, which usually is deducted from the trust amount.
These costs are why many attorneys advise people to create revocable living wills rather than testamentary trusts. On the other hand, if both parents or a single parent has a very high life insurance disbursement and little in the way of ready money, a testamentary trust might be beneficial. It can be the only method by which some people are able to dictate some terms for providing for their children if they suddenly die.
Finding a Trustee
The creation of a testamentary trust also means that a person must act as a trustee until the trust ends. Such a person can be appointed in a will, but some will not take up the role, because it can be time-consuming. In the event that no trustee is appointed, one can be court-appointed, or an adult friend or relative of the testator might volunteer to act as the trustee. It is advisable for someone who wants to create a testamentary trust to talk with friends and family members about who will act as guardian and trustee in the event of his or her death.
Before the children have full disbursement of trust funds, the money is handled by the appointed trustee, and this work is overseen by probate courts. This should ensure that money matters are handled appropriately, but choosing a trustee who is trustworthy is recommended. After the trustee is given responsibility for the money, control of it and the degree to which it can be spent on the care of the child or children might not be sufficiently controlled by a very short or non-specific will. A will might clear a person's wishes regarding the use of the money, but the trustee — if the court agrees — does not necessarily have to honor these wishes.
