What is a Testamentary Trust?

A testamentary trust is a trust created under the terms of a will or living trust that takes effect after the person who created the estate plan dies. Unlike a living trust, which exists and can hold assets during your lifetime, a testamentary trust is designed to manage and protect an inheritance for a beneficiary after your death.

Testamentary trusts can be especially useful when leaving assets directly to a beneficiary would not be appropriate. Depending on your goals, a trust can provide long-term management, control when and how an inheritance is distributed, help protect inherited assets, or provide specialized planning for a beneficiary with disabilities.

How Does a Testamentary Trust Work?

Your estate planning documents establish the terms of the trust, identify the beneficiary, name the trustee who will manage the assets, and provide instructions about how and when the trust property may be used or distributed.

The testamentary trust does not become operative until after your death. At that point, the trustee is responsible for managing the inheritance according to the instructions you established.

This makes a testamentary trust different from a revocable living trust used as part of a California estate plan, which is generally created and funded while you are alive.

Why Would You Leave an Inheritance in Trust Instead of Outright?

An outright inheritance gives the beneficiary direct ownership and control of the assets. That may be appropriate for some beneficiaries, but it is not always the best approach.

A testamentary trust can provide additional management and protection when a beneficiary is young, financially inexperienced, has special circumstances, or could benefit from protecting inherited property for a longer period of time.

The appropriate structure depends on factors such as the beneficiary's age, maturity, financial responsibility, health, personal circumstances, and the amount and type of property being inherited.

What Types of Testamentary Trusts Can Be Used?

Testamentary trusts can be structured in several different ways depending on the estate owner's goals.

• Lifetime trusts: The inheritance remains in trust and is managed for the beneficiary throughout the beneficiary's lifetime.
• Staged distribution trusts: The beneficiary receives increasing control over the inheritance at specified ages or after designated periods of time.
• Special needs trusts: These may provide supplemental financial support for a beneficiary with disabilities while helping preserve eligibility for certain government benefits. Read more about special needs trusts in California.
• Asset-protection trusts: Certain structures may allow a beneficiary to enjoy significant use of inherited assets while providing additional protection from risks such as creditors, lawsuits, divorce, estate taxes, or the loss of certain government benefits.

Kavesh, Minor & Otis also uses a specialized estate planning strategy known as the Personal Asset Trust™ for appropriate clients who want to provide additional protection for inherited assets.

Can a Testamentary Trust Protect an Inheritance for Children?

Yes. A trust can prevent a child or younger beneficiary from receiving an entire inheritance at once before that person is ready to manage it responsibly.

Instead, the trustee can manage the assets and make distributions according to the standards established in the estate plan. Greater control can then be transferred to the beneficiary over time, or the assets can remain protected in trust for a longer period.

Is a Testamentary Trust Right for Every Beneficiary?

No. The type of inheritance plan that makes sense for one beneficiary may not be appropriate for another. An adult child with substantial financial experience may have very different needs from a minor child, a beneficiary with disabilities, or someone facing creditor or marital concerns.

That is why beneficiary planning should be customized rather than relying on a one-size-fits-all distribution provision.

Create an Estate Plan That Protects More Than the Transfer of Assets

A well-designed estate plan should determine not only who receives your property, but also how those assets should be managed and protected after your death. Testamentary trusts can give you considerably more control over the future of an inheritance than an outright distribution.

If you are considering a living trust, testamentary trust, or other inheritance-protection strategy, learn more about estate planning with Kavesh, Minor & Otis. You can also register for a free estate planning seminar to better understand your planning options.