Last week we discussed pour-over Wills in the context of a revocable living trust. This week I want to talk about testamentary trusts. These types of trusts are what we might call springing or contingent trusts. They are created by your Last Will and Testament – hence the description testamentary trust.

What do we mean by springing or contingent trust? 

Normally a trust is created by a stand-alone trust document. A Revocable Living Trust or an Irrevocable Trust is created this way and comes into being legally upon their signing and proper execution. Trusts created in this manner are legal entities in their own right. A revocable living trust may use the grantor's (creator's) tax ID while he is alive. But an irrevocable trust requires its own tax ID after creation. So in both situations, the trust is created when the grantor is alive and well.

But a testamentary trust is different. 

This type of trust is created by the person's Will and only comes into being upon the death of the person who created the Will and the probate processing of that Will. Ironically, when most people think of “trusts”, they really imagine more of a testamentary trust than a revocable living trust. Most people think of a Trust as a vehicle to control assets and the distribution of money after they die. Think of the common idea of a “trust fund baby” benefitting from the proceeds of a trust long after the person who created it has passed away. In some ways, that can be exactly what a testamentary trust is created to do.

Why typically use a testamentary trust?

There are two main reasons to include the provision in your Will for a testamentary trust. The first situation is if your children are very young at the time you make the Will. In this case, the Will usually includes a provision for what happens if the heirs are underage. Who will take care of their inheritance until they are old enough to receive it themselves? And will they get the balance or the entire inheritance when they turn eighteen? Such a clause would typically name a trustee and their successor to manage the assets on behalf of the minor until they become an adult. Additionally, provisions can be included to make partial payments from the trust to assure that the recipient is mature enough to handle their inheritance or to encourage specific accomplishments as they grow older. For instance, you can stipulate that one-third of the inheritance is to be paid out when the child reaches eighteen, one-third when she reaches twenty-five, and one-third when she turns thirty. Or else you can specify some amount to be paid out after they graduate from college. It is up to you.

The other typical reason for a testamentary trust is to protect a possible beneficiary who might be receiving government means-tested benefits such as Supplemental Security Income (SSI). This is not to be confused with Social Security Disability Insurance (SSDI) which is not means-tested. A person receives SSI if they are disabled and below a certain income level. So if that person receives an inheritance that income could disqualify them from receiving SSI. Now if the inheritance is large enough, that may not be a problem. But if not, then a testamentary trust which recognizes the issue and manages the payments in a way so as to preserve their right to SSI might be more appropriate. These types of testamentary trusts are referred to as Special Needs Trusts or the older term Supplemental Needs Trusts.

So to be clear, a testamentary trust is created by a Will and comes into being when all of the following criteria are met. One, the person who created the Will, the testator, has died. Two, the estate has gone through the probate process in the court. And three, the conditions of the trust are still relevant (the child is underage or below the age limitations) or the heir is of special needs.

If you are ready to safeguard your assets and take care of your loved ones, start by calling our office in at 301-315-0811 to schedule an appointment!