Key Things You Should Know About a Testamentary Trust

When does it make sense to opt for a testamentary trust?

If you create a last will and have minor children, it is common to hold their assets in a testamentary trust until they reach an age of your choosing. But everyone's circumstances are different, and you can talk to an attorney for legal advice.

How much does it cost to set up a testamentary trust?

Including testamentary trust provisions during will preparation is generally inexpensive—often just a few hundred dollars more than a basic will. However, ongoing costs throughout the life of the trust may include probate filing fees, court costs, and trustee management fees if you use a professional trustee.

Who should consider setting up a testamentary trust?

A testamentary trust works well for people in specific situations:

• Parents of minor children. Ensures assets are managed until children are mature enough to handle them.
• Caregivers of family members with disabilities. Provides ongoing financial support without disqualifying them from government benefits.
• Those concerned about spending habits. Protects inheritance from being spent too quickly by setting conditions for distribution 

Can a testamentary trust be changed after death?

A testamentary trust has a dual nature when it comes to changes. While you're alive, the trust is completely revocable—you can modify the terms, change beneficiaries, or eliminate it entirely by simply updating your will. However, once you pass away, the testamentary trust becomes irrevocable permanently.

This is different from a living trust, which you can set up as either revocable or irrevocable from the start. With a testamentary trust, your beneficiaries and trustees cannot alter the terms after your death, even if circumstances change significantly. For example, if you specified distributions at age 25 but your child faces unexpected financial challenges at 23, the trustee generally cannot accelerate payments.

This irrevocability provides certainty that your wishes will be honored exactly as you intended. However, it also means you should think carefully about the conditions you set and consider building in some flexibility for the trustee to address unforeseen situations within the bounds you establish.

What are the main advantages of choosing a testamentary trust?

Testamentary trusts offer several key benefits:

• Court supervision. The probate court monitors the trust, ensuring the money is used exactly as your will specifies
• Protection against misuse. The court provides ongoing oversight to guard against trustees who might mishandle funds
• Lower upfront costs. Creating testamentary trust provisions within your will is typically less expensive than establishing a living trust
• Flexibility. You can modify or revoke the trust by simply updating your will while you're alive.

What are the disadvantages of testamentary trusts?

The main disadvantages of a testamentary trust include the following:

• Probate requirement. The trust must go through probate court, adding time and ongoing costs as the trustee reports to the court
• No privacy. Probate records are public, so anyone can see details about your trust and how much money is involved
• Trustee liability. The trustee faces personal responsibility for mistakes, which can make it harder to find someone willing to take on the role.

How a testamentary trust works: A real-life scenario

To understand how a testamentary trust works in practice, consider this scenario: Sarah and Michael are parents of two children, ages 8 and 12. They have $600,000 in assets, including their home, retirement accounts, and life insurance. They're concerned that if something happens to both of them, their children would inherit a large sum of money before they're mature enough to manage it responsibly.

In their wills, Sarah and Michael create a testamentary trust naming Michael's sister, Jennifer, as trustee. The trust specifies that Jennifer should use the funds to pay for the children's living expenses, education, healthcare, and reasonable extracurricular activities. Each child will receive one-third of their share at age 25, another third at age 30, and the remainder at age 35.

If Sarah and Michael both pass away when their children are still minors, here's what happens: First, the will goes through probate court, which validates the will and officially establishes the trust. Jennifer then takes control of the assets as trustee. Over the years, she has paid for the children's private school tuition, summer camps, and eventually college expenses. She files annual reports with the probate court documenting how she's spent the money.

When the older child turns 25, Jennifer distributes roughly $100,000 (one-third of that child's share) directly to them. The remaining funds stay in trust until the child reaches 30 or 35. This staggered approach ensures the children receive their inheritance gradually as they gain more life experience and financial maturity.