# Testamentary Trust: Definition, Examples, Pros and Cons

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*— Investopedia / Danie Drankwalter*

## What Is a Testamentary Trust?

A testamentary trust is a trust that is established by with the instructions contained in a [last will and testament](https://www.investopedia.com/terms/l/last-will-and-testament.asp). A trust is a [fiduciary](https://www.investopedia.com/terms/f/fiduciary.asp) relationship that allows a trustee, a third party, to manage assets on behalf of the [trust's beneficiaries](https://www.investopedia.com/terms/b/beneficiary-of-trust.asp).

A person's will may include instructions to establish a testamentary trust so that the trustee can distribute the person's assets to the beneficiaries outlined in the will. However, a testamentary trust is not created until after the person has passed away. Also, a will could have more than one testamentary trust.

Testamentary trusts can be helpful in an overall [wealth management](https://www.investopedia.com/terms/w/wealthmanagement.asp) strategy since they provide instructions for distributing the assets within a decedent's [estate](https://www.investopedia.com/terms/e/estate.asp). However, there are both advantages and disadvantages of testamentary trusts that should be considered before including one in a will. Testamentary trusts are one of the two types of trust funds [allowed by Canadian law](https://www.investopedia.com/articles/personal-finance/092115/how-set-trust-fund-canada.asp). The second form is the inter-vivos trust.

### Key Takeaways

*   A testamentary trust is a trust that contains a portion or all of a decedent's assets outlined in a person's last will and testament.
*   A testamentary trust is not established until the executor settles the estate after the person passes away as outlined in the will.
*   A testamentary trust can name minors as beneficiaries, in which the deceased's assets are paid out only when they reach a certain age.
*   The trust can also be used to reduce estate tax liabilities and ensure professional management of the assets.
*   A disadvantage of a testamentary trust is that it does not avoid probate—the legal process of distributing assets through the court.

## Understanding a Testamentary Trust

A testamentary trust is created to manage the assets of the deceased on behalf of the [beneficiaries](https://www.investopedia.com/terms/b/beneficiary.asp). It is also used to reduce [estate tax](https://www.investopedia.com/terms/e/estatetax.asp) liabilities and ensure professional asset management.

A testamentary trust doesn't exist until the person passes away, meaning the trust is essentially part of a set of instructions within a person's will to be drafted by a predetermined representative called an [executor](https://www.investopedia.com/terms/e/executor.asp) or executrix. The deceased's assets will be transferred into the newly created trust only after the person has passed away.

A testamentary trust can be established so that the deceased's assets are paid to the beneficiaries only when certain conditions have been met. For example, the language within the trust may state that the [assets](https://www.investopedia.com/terms/a/asset.asp) may be accessed by a child of the deceased for educational expenses until the child reaches the age of 25, at which time the balance will be paid out.

A testamentary trust might also be created to manage the charitable distribution of assets in accordance with the wishes of the deceased.

## Requirements for a Testamentary Trust

A testamentary trust usually involves three parties: The grantor or [trustor](https://www.investopedia.com/terms/t/trustor.asp) who creates the trust, the [trustee](https://www.investopedia.com/terms/t/trustee.asp) who manages the assets held in trust, and the beneficiary or beneficiaries named in the will. A trustor has the option of setting up a testamentary trust, which will be established [upon the death of the trustor](https://www.investopedia.com/terms/g/gift-causa-mortis.asp).

The testamentary trust is a provision within the will that outlines the estate's executor and instructs that person to create the trust. However, the trust is not immediately established after the person's death since the will must go through the probate process. [Probate](https://www.investopedia.com/terms/p/probate.asp) is the legal process through a local court that verifies the authenticity of a will and the named executor or executrix.

> **Important**
>
> A testamentary trust remains in effect until a triggering event is named in the will, such as a surviving child reaching the age of 21.

Once the probate process has been completed, the trust can be established, and the executor transfers the property into the trust. The assigned trustee manages the assets until the trust expires, at which point the beneficiary receives them.

The trust's expiration date is usually tied to a specific event, such as the beneficiary reaching a certain age or graduating from college. Until the trust expires, the [probate court](https://www.investopedia.com/terms/p/probate-court.asp) may check in periodically to ensure that the trust is managed properly.

The trustor can choose anyone to act as a trustee. However, the trustee appointed is not obligated to take on this role and may decline the request. If this happens, the court may appoint a trustee or a relative or friend of the beneficiaries involved may volunteer to act as the trustee.

## Testamentary Trust vs. Living Trust

A testamentary trust is a trust that contains a portion or all of a decedent's assets outlined in a person's last will and testament. It is not established until after the person passes away, after which the executor or executrix settles the estate as outlined in the will.

Conversely, a [living trust](https://www.investopedia.com/terms/l/living-trust.asp) is a trust that is established during the person's lifetime in which an appointed person—the trustee—is responsible for managing the person's assets for the benefit of the beneficiary or beneficiaries of the trust.

Although the instructions for a testamentary trust are outlined while the person is still living, the trust itself is not established until after the person passes away; only then can assets be distributed and placed into the trust. However, a living trust—also called an [inter-vivos trust](https://www.investopedia.com/terms/i/intervivostrust.asp)—allows for more involvement from the trustor since they're alive when the trust is established.

A living trust can be revocable, meaning the trustor can change it, or [irrevocable](https://www.investopedia.com/terms/i/irrevocabletrust.asp), meaning it cannot be changed once established. However, a testamentary trust cannot be revocable and is typically established as irrevocable since the trustor has passed away.

## Advantages and Disadvantages of a Testamentary Trust

A testamentary trust has advantages and disadvantages. Although it can be an effective [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp) tool, its benefit for a person's financial situation can depend on several factors.

### Advantages

A testamentary trust can be helpful if the decedent, such as a parent, has young or minor children and want their assets distributed to them if they pass away prematurely. A parent's testamentary trust can be established with instructions that the funds would only be distributed to the beneficiaries following a specific milestone. For example, funds from the trust would not be distributed to a decedent's children until they turn 18 years of age.

Another advantage to a testamentary trust is that plans for it can be modified while the person is still alive since the trust has not come into existence yet. [A will can be changed at any time](https://www.investopedia.com/articles/personal-finance/051315/will-vs-trust-difference-between-two.asp) before a person passes away. However, a testamentary trust is considered irrevocable because once it is created, following the death, it cannot be changed.

In some cases, parents of young children may not have substantial financial assets, or a couple may not be able to afford the cost of establishing a living trust. Instead, they can create a testamentary trust within their will, which would only come into effect if they passed away.

Although there's still a cost to create a will, the cost of the testamentary trust would come out of the decedent's estate, avoiding the expense of creating a trust while still alive. If it turns out that later in life, they can afford to establish a trust, the testamentary trust instructions can be removed from the will, and a living trust can be established instead.

### Disadvantages

A major disadvantage of a testamentary trust is that it does not avoid probate, which is the legal process of distributing assets through the court. In other words, the executor or executrix must go to the local court with the decedent's will and testament and other documents to prove that they have the right to distribute the decedent's assets and establish the testamentary trust.

The probate process is necessary to move the assets into the beneficiary's name, which can take several months to complete. Since the testamentary trust would not be established until after the person passes away and the probate process has begun, the beneficiaries of the decedent's assets may not receive their assets for several weeks or months.

Another disadvantage of a testamentary trust is that it becomes a public record since it must go through probate. As a result, the beneficiaries of the testamentary trust would also be a public record.

There could also be confusion or a lack of clarity within the will. After a person passes away, the testamentary trust may not be established properly. By not establishing the trust when the person is alive, such as with a living trust, certain details could be overlooked, and the wishes of the deceased may not be properly executed.

Pros

*   Assets can be distributed to minors after they reach a certain age.
    
*   Instructions can be changed while alive.
    
*   This can be a low-cost option if money is tight while still living.
    

Cons

*   A testamentary trust does not avoid probate.
    
*   With probate, the deceased's assets are public record.
    
*   Risk exists that the trust may not be exactly as the deceased wanted.
    

## How to Create a Testamentary Trust

There are many online resources for creating a testamentary trust. However, these documents can become complicated, and inexperienced individuals may not fully understand the implications of the trust they are creating. If prepared incorrectly, there may be legal repercussions in the future.

To best ensure the testamentary trust meets your state's regulatory requirements, work with a lawyer to draw up testamentary trust documents. In addition, this ensures appropriate legal discourse is written to ensure your assets are appropriately distributed.

To create the actual testamentary trust, the settlor must select the trustee and the beneficiary. Then, the settlor selects which assets are to be placed in the trust. This also includes specifying how and when these assets are disbursed to the beneficiary. This information is communicated to the beneficiary in the last will and testament. When the settlor passes, the will passes through probate court. As mentioned above, after the probate process is completed, the trust is created, and the funds can be disbursed.

## Example of a Testamentary Trust

Consider that a benefactor established a testamentary trust for a beneficiary. Under the terms of the trust, they will receive half of the assets at age 35 and the second half at age 55. Let’s say the benefactor is leaving $200,000 to a beneficiary. Setting up a testamentary trust helps ensure a level of financial oversight, preventing the beneficiary from impulsive expenditures at an early age.

Consider another example where the deceased trustor has created a testamentary trust for their spouse, who is a Medicaid applicant or current recipient. Assets in the testamentary trust may be used to pay for medical expenses that are not covered under Medicaid, such as specialist evaluation, special equipment, or additional therapy. Under a testamentary trust, the value of assets will not factor into the spouse's Medicaid eligibility.

## What Is a Testamentary Document?

Testamentary documents are all of the legal documents involved in estate planning that govern how assets are distributed and other wishes of the deceased. They may include a last will and testament, codicil, other contracts involving business, pour-over wills, and more.

## Why Do You Need a Letter of Testamentary?

A letter of testamentary is important since it is issued by the probate court, assigning the executor or executrix named in a person's will with the legal power to act on behalf of the deceased person's estate. The letter of testamentary, along with the person's death certificate, is usually needed in order for the executor to conduct financial transactions on behalf of the estate.

## Do I Need a Lawyer to Get a Letter of Testamentary?

An attorney is often necessary to get a letter of testamentary during the probate process, particularly if there are multiple beneficiaries. However, circumstances may vary. If you're named as the executor in the will, it may not be necessary in all cases.

## The Bottom Line

A testamentary trust can be an effective estate planning and wealth management tool that helps ensure a person's beneficiaries receive the assets they're entitled to after the person has passed away. However, many types of trusts are available, and it's important to contact an expert, such as an attorney or financial professional, to determine what type of trust is best for specific financial circumstances.

> **Article Sources**
>
> 1.  Government of Canada. "[Trust Types and Codes](https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/types-trusts.html)."