A testamentary trust is a legal trust that is created through precise instructions laid out in a deceased person’s Will. A testamentary trust is irrevocable and goes into effect at an individual’s death. In other words, when this individual dies they will no longer be able to change the terms of their Will. However, a testamentary trust is revocable during a person’s lifetime because it technically doesn’t actually exist yet.
A proper Will, and therefore a testamentary trust, is something that is seemingly under-utilized estate planning tool in America. According to a survey by Harris Poll (https://www.usatoday.com/story/money/personalfinance/2015/07/11/estate-plan-will/71270548/), about 2/3rds of Americans do not have a Will.
A Will may contain several testamentary trusts for various beneficiaries and may address all or any portion of the individual’s estate. For example, a testamentary trust can be created for the benefit of a spouse, for children, or for a disabled relative. A testamentary trust can be used to structure how the grantor wants his/her property distributed, just like a will but with these trusts, one can distribute the payments from the trust over a period of time rather than transferring the money in one lump payment. This is particularly useful when giving the property to minor children and beneficiaries with disabilities. These trusts, under certain circumstances, can provide tax advantages when setting up correctly.