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What is a Testamentary Trust?

Money Manager | Saturday, June 12th, 2010

What is a Testamentary Trust?

A testamentary trust is one of the most common varieties of trusts. These trusts are activated by a person’s will at the time of their death. Testamentary trusts are commonly used to provide benefits for a minor child or disabled child even if they are older, in the case of the death of both parents. Testamentary trusts can also be set up under certain circumstances for one’s spouse as a way of providing benefits to them.

What are some things to think about when considering a testamentary trust?

The need for a trustee to administer the trust is one important factor to consider. Administering a trust can be a time-consuming task, and some people are not up to the task of doing it. It is common to appoint a trustee as part of a person’s will. However, if that person is not able to perform the tasks of being the trustee, the court may appoint one. To avoid potential problems and inconveniences for beneficiaries, one should discuss the matter of becoming a trustee with friends and relatives in advance, choosing the one who is best suited for the job. It’s also important to understand that the person specified as the beneficiary for the trust will not receive full disbursement of the funds. Instead, the money will be handled and distributed by the trustee. While this can be a good way of insuring the funds are handled in a responsible manner, which is especially necessary in the case of a minor or disabled child, it also means that somebody else will have control of how the funds are used and dispersed. Although the trustee’s control will be overseen by the probate court, a lot of the monetary control and discretion will be in the hands of the trustee. Therefore, it is extremely important to choose a trustee who will handle the funds in a way that is in the best interests of the beneficiary. Plus, although a person can utilize their will as a means of specifying how the trust is to be handled, there is not really a requirement that the trustee follow these wishes.

How does a testamentary trust compare with a revocable living trust?

Because a testamentary trust could be in place for a lengthy period of time, there can sometimes be extensive legal fees involved. This is because the trustee will be required to go to probate court to have the trust regularly reviewed. A revocable living trust is often a more economical choice that can accomplish some of the same end results. When using a revocable living trust, the grantor will transfer their assets to the trust and name themselves as the trustee. Upon the person’s death, the trustee responsibilities will transfer to another person, providing them with control of the trust. However, in the case of parents who may be leaving a large sum of money or life insurance benefits to a child, a testamentary trust can offer more control and guidance as to how this money should be spent.

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