Executive Summary

A testamentary trust is a trust written into a will that only becomes a functioning legal entity after you pass away and your will is probated.

• Delayed Activation: It only takes effect after death, unlike a living trust which functions during your lifetime.
• Texas Legal Basis: Permitted under Texas Estates Code Section 254.001.
• Complete Flexibility: You can alter or remove the trust rules at any time while you are still alive.
• Custom Distribution: You dictate the exact rules, such as limiting funds to education or releasing money at specific ages.
• Asset Protection: Includes a spendthrift clause to shield funds from the beneficiary’s bad financial choices and external creditors.
• Special Needs Care: Can be structured as a Supplemental Care Needs Trust so disabled heirs retain government SSI or Medicaid benefits.
• Asset Management: You select a trusted trustee to manage the funds and oversee distributions.

Someone recently asked me: What is a testamentary trust? A testamentary trust is a trust that is spelled out in your will. Texas Estates Code Section 254.001 allows a testator to validly leave property in a will to the trustee of a living trust or a trust created at death, aka a testamentary trust. However, a testamentary trust 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”.

Photo by Meritt Thomas on Unsplash

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 typically get put into 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 also 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. And the beneficiary not having control of trust assets allows for the trust to be protected from the beneficiary’s creditors.

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 contact me here.