Testamentary Trusts

A trust is an estate planning legal instrument that is used to avoid probate, while also providing a benefit for a specific beneficiary or group of beneficiaries. While the actual legal requirements for forming a trust can vary by state, the following are some general requirements:

• Settlor Capacity: In order to create a valid trust, the settlor must have the proper mental capacity to create the trust. What this means is that they must intend to create a trust expressed with any necessary formalities of the state, such as the trust being in writing;
• Identifiable Property: Trust property, which is also known as trust res, must be specifically identifiable. What this means is that there must be a sufficient enough description in order to know what property is to be held;
• Identifiable Beneficiary: Generally speaking, the beneficiary or group of beneficiaries must be sufficiently identifiable, meaning they must be able to be determined at the time that the trust is formed. However, in instances involving a charitable trust, this is not generally required; and
• Proper Trust Purpose: The trust that is being formed must be proper, meaning that it cannot be created for any illegal reason. An example of this would be how a person cannot create a spendthrift trust and hold the property in their own name for their benefit, simply in an effort to avoid creditors from reaching their assets. Courts will generally hold that such trusts are considered to be invalid.

In general, all trusts in the United States are presumed to be irrevocable, unless the trust instrument otherwise states that the trust is revocable. However, Texas, Oklahoma, and California have determined that trusts are generally presumed to be revocable, unless they are specified as being irrevocable. Irrevocable means that the trust cannot be terminated by the settlor once the trust has been established. Revocable trusts, then, can be changed, modified, altered, or canceled entirely by the settlor.

What Is A Testamentary Trust?

A testamentary trust is a specific type of trust that is inserted by a testator into their will. The terms of this trust only come into effect when the testator dies. Additionally, the trust names a trustee, who distributes and manages trust assets. In order for a testamentary trust to be inserted into a will, the individual seeking the trust to be added to the will must first have a validly executed will.

In order for a testamentary trust to be considered valid, it must be created with the following requirements in mind:

• There must be a settlor, as the settlor is the creator of the trust;
• The settlor must deliver legal title to trust property, as the person with legal title to property has the right to transfer the property to another party;
• The settlor funds the trust by delivering property to the trustee, who holds the legal title and then places the property into the trust;
• The trustee holds the legal title for the beneficiary’s benefit, as the beneficiary is the person to whom the settlor distributes trust property;
• The settlor must have intent in order to create a trust for any lawful purpose; and
• In order to be validly executed, the trust must be signed by both the settlor and trustee in writing.

How Does A Testamentary Trust Work?

As was previously mentioned, a testamentary trust can be contained in a will. Alternatively, it can be incorporated by reference into the will. “Incorporation by reference” means that the will identifies the trust, by name, as being part of the will. A testamentary trust is irrevocable, which means that it may not be revoked during the settlor’s lifetime.

Additionally, the testamentary trust in the will names the executor of the estate and provides for the appointment of a trustee. When the testator dies, the will goes through the probate process in which the authenticity of the will is established. Distributions are made to will beneficiaries, after which the testamentary trust begins to operate.

The first step would be the executor placing trust property into the testamentary trust. Then, the trustee that is named by the trust manages the trust property. This generally consists of managing assets for trust beneficiaries, until the trust beneficiaries reach a specified age.

An example of this would be how a testamentary trust may require the trustee to manage assets for a beneficiary, who is not to receive those assets outright until they turn 21 years old. Once the beneficiary turns 21, the beneficiary takes ownership of those assets. Testamentary trust management may also consist of managing assets for a disabled or incapacitated person, which continues for as long as the trust terms permit it to continue.

Why Are Testamentary Trusts Used?

Testamentary trusts do not operate in the same manner as a will. A will beneficiary is generally given property without any conditions. However, a trust settlor may wish for a person to receive property, but only upon certain conditions, as was previously mentioned. Another example of this would be the beneficiary’s completion of an educational degree. The trustee of a testamentary trust ensures trust assets are distributed only when the condition has been met.

There are several reasons why testamentary trusts are used. Some of the most common examples include, but may not be limited to:

• Reducing or avoiding estate tax liability;
• Ensuring that the decedent’s assets are professionally managed by a trustee, as trustee management may be preferred when the beneficiaries are children, which will be further discussed below; and
• Allowing a trustee to manage the distribution of assets that the settlor intended to go to charity. Use of the testamentary trust ensures that the charity receives its allotted assets in accordance with the settlor’s wishes.

Concerns that a child may “overspend” their inheritance can be avoided by a trustee managing the assets until the child turns a specified age, as was previously discussed. An example of this would be how a testamentary trust may provide that the child beneficiary’s assets be allotted for the child’s schooling, and not for anything else, until the child turns 25. Once the child reaches 25, the trust may provide that the remaining assets are to be given to the beneficiary outright. Using a professional trustee can prevent beneficiary children from using trust assets in any way other than in accordance with the settlor’s wishes.

What Are The Trustee’s Obligations?

In terms of a trustee’s obligations, trustees have a fiduciary duty. A fiduciary duty is a duty of loyalty, which requires the trustee to act in good faith when managing trust assets. The duty of loyalty also prohibits the trustee from taking trust property for their personal use. It is important to note that beneficiaries can sue a trustee for violating this duty when necessary.

Do I Need An Attorney To Create A Testamentary Trust?

If you wish to create a testamentary trust, or have questions or issues associated with a testamentary trust, you should consult with an experienced and local trust lawyer.

An attorney can help you understand your state’s specific laws regarding the matter, and can help you draft a legally sound testamentary trust according to your unique needs. Additionally, your lawyer will also be able to represent you in court, as needed, should any issues arise.