A testamentary trust is a trust that does not go into effect until the person who created the trust dies. The creator of the trust is called the grantor. Typically, the testamentary trust is written into a will to create a trust for minor children. The will is in effect after it is created, but the testamentary trust within is not valid until the maker of the will dies.
When the creator of the testamentary trust dies, the trust takes effect and is irrevocable and can’t be changed or cancelled. However, the testamentary trust can be changed by the grantor during his lifetime as the trust is not binding until the grantor’s death.
When to Use a Testamentary Trust
What do you do when you want to leave assets to your minor children in your will? If you leave them property in a simple will and you pass away before they reach legal age, then the court will control the assets until they reach 18 or 21, depending on the state.
You may create a testamentary trust or what is called a “child’s trust.” Minors can’t receive gifts of property unless someone of age is named in the trust to manage the property for the children until they are old enough to do so themselves. The creator of the trust decides at what age the minor can own the property and will state that age in the trust.
A typical example of how this works would be when a couple wish to leave money to their minor child. They decide to create a testamentary trust and name one of the child’s aunts as the trustee. The aunt will manage the property for their child until they both pass away or until the age set in the will where their child takes control.
The advantage of a testamentary trust is that you do not have to transfer property into the trust while you are living, the property transfers upon your death.
A disadvantage of a testamentary trust created through a will is that it does not avoid probate, so the will is entered into probate court to determine its validity. Probate can take some time and eat away at the assets.
Alternatives to a Testamentary Trust
A better option may be to leave money to minor children by creating a living trust. You choose a trusted person to manage the inheritance for your children until they reach the age you designate for them to take over the assets. The advantage is that the living trust does not go through probate and the assets are protected from the judicial system.
You may also leave money to minors under the Uniform Gifts to Minors Act. Typically done through a bank, you name a custodian to manage the funds. Court approval may be required if the amount is over $10,000. The minor will receive the funds when they turn 18.