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In the section Revocable Living Trust, I explained that all trusts are either revocable or irrevocable. Additionally, all trusts are either inter vivos trusts or testamentary trusts. Any trust that you establish during your lifetime is an inter vivos trust. A trust that is established upon your death is a testamentary trust. An inter vivos trust can be revocable or irrevocable. However, because a testamentary trust is established only at your death, it is irrevocable (because you are no longer living and cannot revoke it).
A testamentary trust is set up in your will. It is not fully established until your death because it does not yet contain property. Your death triggers the funding of the trust with the assets in your will that are designated for the testamentary trust.
A testamentary trust, like a revocable living trust, gives you the ability to control the distribution of the assets in the trust. I often use testamentary trusts with couples who have minor children. Because minors are not capable of owning large sums of money or other property, a testamentary trust is created to hold those assets. You get to control who will manage the trust by naming a trustee and successor trustees. In a testamentary trust you are also able to stipulate for what reasons your beneficiaries will receive distributions. Then, once your child reaches legal age, you can stipulate that your child receive fractions of what still remains in the trust at specified ages. It may look something like this: Jane was 8 years old when parents died in an auto accident. Their wills established Jane as the beneficiary of their estates and provided for a testamentary trust to hold these assets. The trust included instructions that the trustee was to make distributions for Jane’s health, education, support and maintenance. At age 22 the trust provided that Jane should receive 1/3 of the remaining assets in the trust. At age 25 she was to receive 1/2 of the remaining assets and finally, at age 30, she would receive the remainder of the assets.
Additionally, testamentary trusts often contain spendthrift provisions that prohibits beneficiaries from selling, giving away, or otherwise transferring his or her interest in the trust assets. This is important because, it prevents the creditors of a beneficiary from reaching the beneficiary’s interest in the trust. It provides a beneficiary with asset protection that would not be available with an outright distribution of asset.
Sometimes clients are reluctant to utilize a testamentary trust because they believe they will lose control of their assets because they are in a trust. That is NOT the case. Prior to your death, the testamentary trust is like an empty box that sit in your will. Your assets are still in your name and you maintain complete control of them. You can sell them, give them away, etc. The testamentary trust can be amended or revoked any time before your death. Upon your death, the assets you have designated, will go into that previously empty box to be held for the benefit of your child.
A testamentary trust can terminate at a time you specify, or it can continue for a lifetime. If you choose for it to last a lifetime, you can specify that at a certain age your child can take over as trustee or co-trustee. But, if you have a child who is not good at handling finances, the trust can last for the remainder of the beneficiary’s lifetime with someone else as trustee
One thing you must understand is that a testamentary trust does NOT avoid probate. Probate of the will is necessary to transfer assets belonging to you into the trust after you die.
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