Testamentary Trust

Introduction

A testamentary trust is made as per the instruction mentioned in the last will and testament. A trust relationship is established when a trustee is appointed to take care of particular work (in this case a will). It starts with making a will and appointing a trustee and ends only when the will is executed.

Testamentary trust helps in distributing the overall property and investment of the person. A testamentary trust is not created until the person has passed away. A trustor can choose any of his family, friends or close relative to act as a trustee. In case a person the trustee does not want to handle the responsibility the same can be transferred to other people in case of the death of the trustor.

Testamentary trust contains instructions as to how the wealth of the deceased has to be divided by the trustee. It can be executed even for a minor after he attains the age of majority. The person who drafts this after the death of the trustor is the executor or executrix.

There may be certain conditions applicable for execution of the will which need to be followed for e.g., some will mention inheritance on or after the beneficiary’s 18th birthday, basic education, or any other criteria which has to be fulfilled before transferring the ownership. These conditions are kept to make sure the person is capable of handling the property.

Parties in the testamentary trust

There are three parties involved, the one who creates a trust is known as the trustor. The one who executes is the trustee and the beneficiary involved who can also be a minor. If the grantor or trustor is alive until then the assets will stay in his/her name.

The trust is not immediately established as it has to go through the probate process. Probate is a legal requirement through a court in local jurisdiction which examines the authenticity of the executor or executrix.

Difference between a living trust and a testamentary trust

There are two kinds of trust. Testamentary Trust is executed after the person is passed away whereas Living Trust can be executed when the person is alive as the management is handled by the trustee. In the case of testamentary trust the will is made when the person is alive and after death transferred to the beneficiary.

In a living trust, the trustee can be more involved in handling the assets of the trustor. A testamentary trust cannot be changed as it is executed after the death of the trustor whereas the living trust can be changed as the trustor is alive even after the will is made.

If the property is directly transferred to the beneficiary then the same is liable for taxation. A testamentary trust saves the burden of paying more tax amount of the beneficiary. In some states, there are exemptions provided for ownership of a testamentary trust. If the amount is not transferred at a single time but rather is separated on monthly basis, then there will be benefits in payment of tax acquired by the beneficiary.

Difference between testamentary and non-testamentary trust

When the grantor signs the trust instrument, notifies the trust document and actually transfers the property into the trust, a non-testamentary trust, also referred to as a living trust, comes into existence. Living trusts, which are non-testamentary trusts that take effect during the grantor’s lifetime, are what they are known as. Non-testamentary trusts can also be both revocable and irrevocable.

A testamentary trust, in contrast, is established after the death of the trust maker and does not take effect during the grantor’s lifetime. The trust is revocable and the grantor is free to alter it at any time before passing away. However, the testamentary trust becomes irrevocable upon the passing of the grantor.[1]

Difference between a testamentary trust and a will

A trust is considerably different from a will. In a trust, the property or assets are first given to the trustee. The trustee then gives the beneficiary the property in accordance with the directions laid out by the trust’s creator. Not every trust established is a testamentary trust. Living trusts are among the trusts that are established throughout the testator’s lifetime.

A will is a type of estate planning instrument that enables a person to specify how their assets should be dispersed after their passing. Real estate, cash, or even personal property may be left behind in a will. Property usually transfers to a recipient directly under a will. Due to the testator’s passing, the will administrator often handles this, but the property still passes.

Creation of a testamentary trust

A testamentary trust is established as part of a final will and testament. In a final will and testament, more than one testamentary trust is permissible. The settlor of a testamentary trust must pass away before it becomes effective.

A testamentary trust can only be established by the settlor, who must also name the trustee, beneficiary, and the assets to be held in the trust. The settlor might also dictate when and how the trust money will be distributed to the beneficiary. These details should all be included in the final will and testament.

The will goes through probate once the testator passes away. After this is finished, the trust is established, and money can start to be distributed. Many testamentary trusts have clauses that outline when some or all beneficiaries receive their trust distributions (e.g., at age 18). If this is the case, the trustee must present evidence that the trust is being managed in line with the will every year until the requirements are satisfied in probate court[2].

Testamentary document and letter

A testamentary document is an addition to a person’s will that details particular details or instructions. A confidentiality agreement or an indemnity document may be included in a testamentary instrument, both of which may release a person or party from all financial and legal liability.

The probate court issues a letter of testamentary, which is significant because it gives the executor or executrix designated in a will the authority to manage the estate of the deceased individual. In order for the executor to handle financial transactions on behalf of the estate, they typically need the letter of testamentary as well as the decedent’s death certificate.

Advantages and disadvantages of a testamentary trust

A testamentary trust has benefits and drawbacks. The advantages or disadvantages of a testamentary trust for a person’s financial condition can vary depending on a number of factors, even though it can be a useful estate planning instrument.

Advantages

If the decedent, such as a parent, has young or underage children and wants their assets given to them in the event that they pass away prematurely, a testamentary trust may be useful. The terms of a parent’s testamentary trust can specify that the money would only be given to the beneficiaries after reaching a particular objective. For instance, money from the trust wouldn’t be given to a deceased person’s children until they reached the age of 18.

A testamentary trust also has the benefit of allowing for changes to be made while the grantor is still living because the trust has not yet been established. In other words, since a will can be modified at any point before to death, a testamentary trust is effectively a revocable trust.

Parents with young children may occasionally lack significant financial resources, or a couple may not be able to afford the costs associated with creating a living trust. Instead, they may establish a testamentary trust in their will that would only take effect upon their passing.

While the cost of establishing a will remains, it would be covered by the decedent’s estate, saving the expenditure of setting up a trust while the decedent was still living. The testamentary trust instructions in the will can be deleted and a living trust established in its place if it turns out that they can afford to create one later in life.

Disadvantages

A significant drawback of a testamentary trust is that it does not circumvent the legal procedure of dispersing assets through the court, known as probate. To confirm their authority to divide the decedent’s assets, the executor or executrix must appear in court with the decedent’s will and testament and other supporting documentation.

The probate procedure, which might take many months to complete, is required in order to transfer the assets into the beneficiary’s name. The beneficiaries of the decedent’s assets might not get their money for weeks or months because the testamentary trust wouldn’t be created until after the individual dies and the probate procedure has started.

Additionally, there can be ambiguity or a lack of clarity in the will, and after someone dies, the testamentary trust might not be properly constituted. There is a chance that important details could be missed and the wishes of the deceased could not be effectively carried out if the trust is not established while the person is still alive, as is the case with a living trust.

A testamentary trust also has the drawback of becoming public record since it must go through the probate process. As a result, the testamentary trust’s beneficiaries would likewise be known to the public.

Example of a testamentary trust

Think about a beneficiary who has a testamentary trust formed for them. The trust stipulates that they shall receive half of the assets when they are 25 and the other half when they turn 45. Let’s imagine the donor is leaving a beneficiary Rs.50, 00,000 in their will.

By establishing a testamentary trust, one can provide some level of financial supervision and shield the recipient from making rash purchases when they are young. Also, the same amount can be invested in stocks and mutual funds which can provide better gains to the beneficiary.

Conclusion

Therefore, a testamentary trust is one of the best ways to transfer the assets of the trustor to the beneficiary and as the document has legal recognition it would avoid disputes between the beneficiaries. The trustee appointed will make sure the conditions are fulfilled and then will transfer funds to the beneficiary. It is also an important tool to make sure that there is a supervision over the finance of the beneficiary and is spent wisely.

Bibliography:

1. The Seven Key Aspects of Testamentary Trust by Mr Matthew Burgess (Author), Patrick Ellwood (Author), Tara Lucke (Author)
2. https://trustandwill.com/learn/testamentary-trust
3. https://www.investopedia.com/terms/t/testamentarytrust.asp

References:

[1] https://www.legalmatch.com/law-library/article/what-is-a-testamentary-trust.html

[2] https://smartasset.com/retirement/what-is-testamentary-trust

This article has been authored by Aditya Suryavanshi, a student at K.C Law College, Mumbai.