What Is a Testamentary Trust and How Does It Work?

When it comes to estate planning, you’ve probably heard of wills and living trusts—but what about testamentary trusts? If you’re looking for a way to provide for your loved ones while maintaining some control over how your assets are distributed, a testamentary trust might be a great option. So, what exactly is a testamentary trust, how does it work, and how do you create one? Let’s break it down in simple terms.

What Is a Testamentary Trust?

A testamentary trust is a type of trust that is created through a will and only goes into effect after you pass away. Unlike a revocable living trust, which is set up while you’re still alive, a testamentary trust doesn’t exist until after your death.

Think of it like a set of instructions embedded in your will. When you pass away, your executor follows those instructions to create and manage the trust, ensuring your assets are handled exactly as you intended.

How Are Testamentary Trusts Used?

Testamentary trusts are often used to provide financial protection and structure for beneficiaries. Here are a few common reasons people use them:

Protecting Minor Children – If you have young kids, a testamentary trust can hold their inheritance until they reach a responsible age. Instead of an 18-year-old receiving a lump sum (which could be spent in a flash), the trust can distribute funds over time.

Providing for a Loved One with Special Needs – If a beneficiary has special needs, a testamentary trust can ensure they receive financial support without disqualifying them from government benefits like Medicaid or Social Security.

Managing Assets for Financially Irresponsible Beneficiaries – If you’re worried about a beneficiary blowing through their inheritance, a testamentary trust allows you to set conditions for distributions, for example: “$10,000 per year until they turn 30”.

Tax and Creditor Protection – Testamentary trusts can sometimes provide estate tax benefits or protect assets from creditors or divorce settlements, depending on how they’re structured.

How to Create a Testamentary Trust

Creating a testamentary trust involves a few additional steps

1. 1. Draft a Will That Includes the Trust
      Since a testamentary trust is created through your will, you’ll need to work with an estate planning attorney to include the trust provisions. The will should specify:

Who the trustee will be (the person responsible for managing the trust).

Who the beneficiaries are.

How and when the assets should be distributed.

1. 1. Define the Trust Terms
      You’ll need to decide:
      How long the trust should last (such as, until a child turns 25).

What expenses the trustee is allowed to pay for (education, medical bills, etc.).

Any conditions for distributions, for example, “must graduate college first”).

1. 1. Name the Trustee
      Choosing the right trustee is key. This person (or institution) will be responsible for managing the trust and ensuring your wishes are carried out. It could be a family member, a trusted friend, or a professional fiduciary.
   2. Fund the Trust (After Death)
      Unlike a living trust, a testamentary trust isn’t funded while you’re alive. Instead, your assets go into the trust after you pass away, usually through your will’s probate process. This means your estate will go through probate before the trust becomes active.

Pros and Cons of a Testamentary Trust

Pros:

Control Over Asset Distribution – You decide how and when beneficiaries receive their inheritance.

Great for Minors or Special Needs Beneficiaries – Protects vulnerable individuals from mismanaging their inheritance.

Potential Tax Benefits – Can reduce estate taxes and offer creditor protection.

These types of trusts are great for people that don’t have a lot of assets while they’re living, but have significant funds that will come in through things like life insurance, and other assets that are not liquid until they pass away.

Cons:

Requires Probate – Since it’s created through a will, it must go through probate, which can be time-consuming and costly.

Less Flexibility Than a Living Trust – Since the trust only takes effect after death, you can’t make changes without updating your will.

Ongoing Trustee Fees – If managed by a professional trustee, there could be administrative costs.

Is a Testamentary Trust Right for You?

If you want to provide long-term financial security for your loved ones but aren’t interested in setting up a trust while you’re alive, a testamentary trust can be a smart, structured way to manage your estate. It’s especially useful for parents of young children, individuals with special needs beneficiaries, or those who want to protect assets from mismanagement.

If you’re considering a testamentary trust, consulting with an estate planning attorney is the best way to ensure it’s set up correctly and aligns with your goals. Schedule an appointment by clicking below.