Testamentary Trust
A testamentary trust is a legal entity created through the instructions and provisions outlined in a decedent’s will. Unlike living trusts, testamentary trusts do not become effective until the death of the individual who has created the will, known as the testator. The aim is to manage and protect the assets for beneficiaries, often providing for minors, dependents with special needs, or periodic distributions to beneficiaries over time.
Examples
- Unified Credit Trust: A testamentary trust that maximizes the use of the federal estate tax exemption, often referred to as a “bypass” or “credit shelter” trust. This type of trust ensures that part of the estate can pass to the heirs free from federal estate tax.
- Minor’s Trust: A testamentary trust established to provide for a minor until they reach adulthood. This ensures proper management and distribution of assets until the beneficiary is capable of handling their finances.
- Marital Trust: Also known as a QTIP (Qualified Terminable Interest Property) Trust. It allows the surviving spouse to benefit from the assets during their lifetime, with the remaining assets passing on to other designated beneficiaries after the spouse’s death.
Frequently Asked Questions
Q1: How does a testamentary trust differ from a living trust?
- A: The primary difference is that a testamentary trust becomes effective only after the death of the testator, whereas a living trust (also known as an inter vivos trust) is set up and becomes operational during the creator’s lifetime.
Q2: Who manages a testamentary trust?
- A: A trustee, appointed by the testator in the will, is responsible for managing the trust in accordance with the terms and conditions outlined in the will.
Q3: Can a testamentary trust be altered?
- A: A testamentary trust itself cannot be altered after the testator’s death. However, the testator can make changes to the will during their lifetime as long as they comply with the legal requirements for amending a will.
Q4: Are testamentary trusts subject to probate?
- A: Yes, because a testamentary trust is part of a will, the will must go through the probate process before the trust becomes active.
Related Terms
- Will: A legal document declaring a person’s wishes regarding the disposal of their property after death.
- Trustee: An individual or organization appointed to administer the trust as per its terms.
- Beneficiary: An individual or entity entitled to receive benefits from a trust or a will.
- Testator: A person who has written and executed a will.
- Probate: The judicial process through which a will is validated and the decedent’s estate is distributed.
Online Resources
References
- TEP, Denis Clifford. “Make Your Own Living Trust.” Nolo, 2022.
- Brown, Terence. “Estate Planning for Dummies.” For Dummies, 2015.
- Hanks, Walpole, & Viener. “Wills and Trusts in a Nutshell.” West Academic Publishing, 6th Edition, 2016.
Suggested Books for Further Studies
- “Living Trusts for Everyone: Why a Will is Not the Way to Avoid Probate, Protect Heirs, and Settle Estates” by Ronald Farrington Sharp
- “Plan Your Estate” by Denis Clifford
- “The Complete Book of Wills, Estates & Trusts” by Alexander A. Bove Jr. Esq.
- “Understanding Living Trusts” by Vickie Schumacher
Real Estate Basics: Testamentary Trust Fundamentals Quiz
### When does a testamentary trust come into effect?
- [ ] Immediately upon creation.
- [ ] When the trustee decides.
- [x] After the testator's death.
- [ ] When the trust is funded.
> **Explanation:** A testamentary trust becomes effective only after the death of the testator, based on the provisions laid out in their will.
### Who is the person that creates a will?
- [ ] Trustee
- [ ] Beneficiary
- [x] Testator
- [ ] Attorney
> **Explanation:** The individual who writes and executes a will is known as the testator.
### What is the main function of a trustee?
- [ ] To write the will.
- [x] To manage and administer the trust.
- [ ] To inherit the estate.
- [ ] To validate the will in court.
> **Explanation:** A trustee is responsible for managing the trust according to its terms and conditions, ensuring the best interests of the beneficiaries.
### Why might a testamentary trust be beneficial for minors?
- [ ] They offer immediate access to all assets.
- [x] They ensure assets are managed until the minor reaches adulthood.
- [ ] They reduce immediate tax liabilities completely.
- [ ] They help avoid all probate processes.
> **Explanation:** A testamentary trust can manage assets on behalf of minors until they reach adulthood, providing structured and prudent financial support.
### What types of assets are included in a testamentary trust?
- [x] The assets mentioned and legally specified in the will.
- [ ] Only properties and real estate.
- [ ] Only cash and bank accounts.
- [ ] None of the above.
> **Explanation:** A testamentary trust includes assets as specified and legally documented in the will.
### Which of the following terms is directly related to a testamentary trust?
- [ ] Zoning laws
- [ ] Deed restrictions
- [x] Probate process
- [ ] Mortgage approval
> **Explanation:** The probate process is directly related to testamentary trusts because a will that creates the trust must go through probate before the trust becomes effective.
### What is one common feature of a Unified Credit Trust?
- [ ] It immediately distributes all income equally among beneficiaries.
- [ ] It automatically dissolves after a year.
- [x] It maximizes the use of the federal estate tax exemption.
- [ ] It requires annual federal court reviews.
> **Explanation:** A Unified Credit Trust, also known as a bypass trust, is designed to maximize the use of the federal estate tax exemption.
### Who typically benefits from a Marital Trust?
- [ ] Only minor children
- [ ] Creditors of the estate
- [x] Surviving spouse
- [ ] Charitable organizations
> **Explanation:** A Marital Trust benefits the surviving spouse during their lifetime by providing income or usage of the estate’s assets.
### Can the terms of a testamentary trust be changed after the testator's death?
- [ ] Yes, it can be changed by any beneficiary.
- [ ] Yes, it can be altered by a probate judge.
- [ ] Yes, upon agreement by majority beneficiaries.
- [x] No, it cannot be altered once the testator has passed.
> **Explanation:** The terms of a testamentary trust cannot be changed after the testator’s death.
### What primary legal document is essential for creating a testamentary trust?
- [ ] Real estate deed.
- [ ] Power of attorney.
- [x] A will.
- [ ] A property title.
> **Explanation:** A will is the fundamental legal document required for creating a testamentary trust.
