Realizing the need to start building equity, this family upgraded a house, and their finances in the process.
What is a testamentary trust?
A testamentary trust is a trust that is specified in a person’s last will and testament. A will may contain more than one testamentary trust. Testamentary trusts generally are created to ensure the care of young children or loved ones who are unable to care for themselves.
Testamentary trusts take effect upon the person’s death and usually are used when the dead person’s wishes to leave assets to a beneficiary but wants the beneficiary to receive the assets at a later date or needs another person to manage those assets indefinitely.
The person appoints a trustee, who is in charge of managing and distributing funds in the trust. The person may leave specific instructors for the distribution or the trustee may be given the discretion to determine when and how to distribute the assets.
It is imperative that the person appoints a trustee who is trustworthy and capable of overseeing the trust. Trustees are required to act in the best interest of the beneficiary and their decisions are monitored by the probate court.
In addition to distributing assets, the trustee’s responsibilities include filing and paying taxes on the trust, making investment decisions and providing an annual report to the probate court.
Depending in the specific circumstances, the trustee’s obligations can last for several years. Trustees who lack experience in meeting these obligations should consult with an estate planning attorney.
Testamentary trust example
Dave and Sarah have included a testamentary trust in their will. In the event of their death, their life insurance and assets will be placed in a trust for their two children, who are 8 and 10 years old.
Sarah’s sister, Lisa, has agreed to act as the trustee. If David and Sarah die, Lisa will manage the trust’s funds and distribute the funds as specified by Sarah and David.
The couple has specified that the funds may be used to pay for the children’s education and care as Lisa determines appropriate. They also have specified that the children will each receive half of the remaining funds when they turn 24 years old.
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