What Is a Testamentary Trust in a Will?

Estate planning in Huntsville, Alabama, can get just as confusing as anywhere else when terms like “wills” and “trust” get thrown around. 

Typically, a trust usually works in tandem with a last will and testament to ensure that your final wishes are documented and carried out correctly. 

Trusts are still essential documents when it comes to ensuring that your loved ones are taken care of. This article will give you a breakdown of one of the most critical types of trusts, which is the testamentary trust.

Keep reading to learn more. 

What Exactly Is a Testamentary Trust?

A testamentary trust is a trust created from the terms of your last will and testament.

When you write out your last will, it usually involves specifying the distribution of your assets and possessions and your property. When you include a trust within your will, you’re essentially establishing a protected account, so to speak, in which certain assets will be transferred when the time comes.

A testamentary trust only goes into effect once you’ve passed. This makes it an irrevocable document. 

When you break down a testamentary trust, three specific parties are outlined: 

• The grantor, which is the person writing the trust

• The trustee, which is the individual appointed to manage the assets in the testamentary trust

• The beneficiary, who is the person—or persons—designated to receive the assets within the trust

  These trusts are most commonly used among individuals with young children to ensure that they are taken care of properly and keep certain assets in the family. Testamentary trusts also come with several benefits, including asset protection, potential income tax breaks, limited beneficiary limits, no effect on pensions, and limited transfer fees.

Each trust can also be customized per beneficiary if you wish. 

How Does it Work?

The way testamentary trusts work is actually straightforward to understand. By design, they’re created to give you control over how your assets are distributed among your beneficiaries when it’s time.

It’s important to understand that a testamentary trust is not the same as a living trust. Therefore, it has no effect while you’re still alive. 

Testamentary trusts can be set up to pass on the beneficiary’s inheritance in a graduated manner. For example, they may receive their inheritance or certain assets once they’ve reached certain milestones, such as graduating high school or college, getting married, and so on.

Additionally, because the assets and inheritances listed in a testamentary trust don’t transfer into the trust account while you’re still alive, your estate won’t be able to avoid probate. 

The probate process is meant to determine the trust’s authenticity, which can take a considerable amount of time. In the state of Alabama, probates must take a minimum of six months. So, after applying for probate, you can expect the process to be finished within six to nine months.

Lastly, once the trust goes into effect, the appointed trustee will manage the assets until the trust is fulfilled. The expiration date for the trustee’s responsibility is usually aligned with a specific event, such as the beneficiary turning a certain age or hitting a milestone, as mentioned above.

However, the appointed trustee can decline the responsibility by resigning despite being directly named in the trust. When this happens, the probate court will appoint a trustee for you. They’ll also continuously check in on the trustee, whether they’re court-appointed or not, to ensure that the trust is managed appropriately until its expiration date.

Types of Testamentary Trusts

When you’re thinking about the benefits that come with creating a testamentary trust, one thing to keep in mind is that there are two different types of testamentary trusts—separate trusts and family trusts.

Separate Testamentary Trusts

Separate testamentary trusts, also referred to as separate for children testamentary trusts, are simply separate trusts for each beneficiary you’d like to name.

For example, suppose you have three children. You’d like to distribute your assets among them equally or accordingly in another way. In that case, you could create three separate trusts outlining the specifics for each child.

When the time comes, the trusts would be managed and distributed individually depending on the dates or milestones you’ve assigned to each inheritance. 

Family Testamentary Trusts

Family testamentary trusts are sometimes referred to as “pot” trusts, meaning that all of your assets will be managed together. Family trusts allow the assets to be distributed based on each child’s needs and are often used when parents either want or need to leave more funds to one child than the other.

For example, if one child has special needs, they may require additional financial support throughout their lives. A family trust would appropriately distribute that financial support to ensure that they are taken care of and that your money or assets aren’t being unfairly distributed.

Testamentary vs. Living Trusts

When you’re estate planning in Huntsville, Alabama, you must understand the differences between the various trusts available. This is to ensure you make the right financial decisions for your loved ones and your assets.

For example, let’s say you wanted to keep your assets private. If this is the case, you may want to opt for a living trust as the assets within a living trust don’t go through probate and therefore don’t become a matter of public record.

Living trusts are also put into effect while the grantor is still alive, which means if one or more beneficiaries reach a milestone, they can receive their inheritance immediately. 

They can also be set up to be revocable by the grantor, in addition to irrevocable trusts. These trusts come in handy if you wish to make modifications. As previously mentioned, a testamentary trust only goes into effect once you’ve passed away, making it irrevocable after that.

How Can I Set Up a Testamentary Trust?

Once you’ve decided on the type of trust that’s right for you, your loved ones, and your assets, all you have to do is document how you want everything to be managed and distributed. You’ll also need to declare your appointed trustee, which should be someone you trust.

It’s best to consult with an estate planning attorney for your wills and trusts to ensure you have all of your bases covered. Contact us today to speak with Sarah S. Shepard or the experienced Huntsville last will and testament attorneys in our law firm about planning your estate.