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What Is A Testamentary Trust?

what is a testamentary trustSomeone recently asked me: What is a testamentary trust? A testamentary trust is a trust that is spelled out in your will. However, it does not actually become a legal, functioning trust until after you pass away and your will is probated. At that time the trust “springs to life”.

This is very different from a living trust. If you create a living trust, it is created and comes to life while you are still alive. And assets get put in that trust while you are still alive as well.

You can create one or as many testamentary trusts in your will as you would like. Typically they are created for a spouse or your children. But you could do it for anyone else also if you’d like.

Likewise, with wording in the will you get to set the rules for how the trust gets handled. For example, if you set up a testamentary trust for one of your children, you can dictate that the funds only go to education and reasonable living expenses. You could also say a certain percentage of the value of the trust goes to the child upon reaching a certain age. The possibilities for including your desired wishes are very open.

Usually a testamentary trust will also contain wording that helps protect the trust assets from creditors. This wording is typically called a spendthrift clause. It is an easy and excellent way to protect family assets from outsiders. It also helps protect the trust assets from potential bad financial decision making by the beneficiary. Because the beneficiary does not have control of the trust assets.

Another option for you is available if there is a beneficiary with special needs. This is someone who has some sort of disability that gives them access to government programs like SSI or Medicaid. These programs are “needs-based”, so that person cannot own more than $2,000 in assets. You can include wording that makes the trust a Supplemental Care Needs Trust. This makes sure the beneficiary still qualifies for these government programs.

And like any other trust, you get to decide who will become the trustee of the trust. This person will manage the assets in the trust and make distributions from the trust. So of course you should pick someone you believe would do a good job handing things. Ideally you should talk to this person about it before naming them as the trustee to make sure they are up to the task.

And like anything else in your will, if later on you decide to make changes to the testamentary trust you can do so. You could even remove the testamentary trust altogether if you wanted to. This gives you an enormous amount of flexibility.

If you have any questions, please ask me in the comments section below or contact me directly.

Law Office of Keith Hajovsky


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