Generally, one of the biggest hesitations that some people have about creating a trust is the fact that they will be required to give up use of the assets they are giving to the trust. In many cases, people may want to create a trust for a child or grandchild, but they do not want to have to give away the money during their lifetime.
A Testamentary Trust is a trust established under the provisions of a person’s Last Will and Testament. Unlike trusts created during the lifetime of the Grantor, a testamentary trust does not become effective until the Grantor has died and his Will has been through probate. Likewise, because the trust is not effective until the Grantor’s death, none of the assets intended to be placed in the trust will be transferred to the trust until after the Grantor’s death. As a result, the Grantor does not lose the use or benefit of the assets during his lifetime, but after his death, he has the assurance that the assets are going to be controlled and used the way that he intended.
Example: Husband died leaving a Will that left his entire estate to his Wife, except for a gift of $50,000 that Husband left in Trust for the benefit of his only Son. In his Will, Husband designated his brother to serve as the trustee of the trust for his Son, and he stated that the trust should terminate upon Son’s 25th birthday. Prior to that time, however, Husband designated that the trustee could be used for Son’s education and any medical expenses.
Unlike a trust created during Husband’s lifetime where he would transfer the money to the trustee at the time the trust was created, the testamentary trust designates that the money is transferred as a result of Husband’s death. By doing this, Husband preserves his ability to use that money for as long as he lives, but upon his death, he ensures that the money will be left to Son.
Testamentary trusts are used very widely when leaving gifts under a Will to minor children. Because minors are not capable of owning large sums of money or other property, the creation of a trust enables you to provide a trust for the children if one or both of the parents or grandparents die while the children are still too young to manage the money for themselves. The trust for the children not only alleviates any problems created by minor children receiving property, but it also allows you to designate a trusted friend or family member to make decisions regarding the proper distribution of the trust assets for your children.
If no trust is created for the children and the children become entitled to receive money or property as a result of the death of their parents or other family members, then the Courts are required to step in and appoint a guardian to protect the minor children’s money. Many people incorrectly assume that a parent or family member is automatically authorized to manage a child’s money. However, this is not true. Rather, the Courts are required to appoint a guardian to manage the money, but the guardianship process is very expensive and cumbersome. The inclusion of a trust for the children in a Will is a much easier way to provide for the children and simply the process for them.