How to Name a Testamentary Trust as a Beneficiary
You don't have to name a testamentary trust as a beneficiary in your will because, by definition, it's already a beneficiary. Testamentary trusts differ from inter-vivos or living trusts in that they don't exist until after your death. They accept ownership of your property from your estate, just as a beneficiary would. The major difference is that a testamentary trust holds on to the property and manages it for your other beneficiaries.
Living trusts are created – and assets are transferred into them – during the trust maker's lifetime. The trust documents dictate how it is to be run and how distributions are will be made to beneficiaries. With a testamentary trust, these terms are included in your last will and testament instead. Ownership of property isn't transferred during your lifetime – it stays with you. Nothing changes until you die, at which time the provisions of your will obligate your executor to create the testamentary trust to take ownership of your property, just as if the trust were a named beneficiary. You can direct that all your assets should transfer to your testamentary trust, or only specific assets. You can name some heirs or friends as beneficiaries of your trust, and others as beneficiaries of your will – whatever you choose.
Another major difference between living trusts and testamentary trusts is that living trusts bypass probate. Assets pass directly from a living trust to your named beneficiaries. With a testamentary trust, your property first forms your probate estate, then your executor transfers it out of your probate estate into the trust, so probate is unavoidable, just as it would be if the assets were transferring to other beneficiaries instead. You can name the same person as executor of your will and trustee of your trust, or you can name two individuals. Depending on the terms of your will, your trustee might have an ongoing obligation to report to the court regarding the status of the assets the trust holds, even after probate closes.
Testamentary trusts can be helpful if you're considering leaving considerable property to minor children. Minors can't legally hold title to property or manage their money themselves, so you'll need someone else to do this for them. For example, if your grandchild lives with her other parent – not your child – and you don't want that parent to have access to your grandchild's entire bequest all at once, you might consider setting up a testamentary trust in your will. Your grandchild's bequest would not go to her – your trust would accept it on her behalf, effectively stepping into her shoes as a beneficiary. You could then direct your trustee as to how you want funds disbursed – maybe in small increments – or you could direct that the trust retain your grandchild's inheritance until she reaches the age of majority. You could do the same for your own children if your spouse predeceases you or dies with you.
Closing the Trust
Testamentary trusts typically include a predetermined date when they'll close or stop operating. If you're setting up the trust for more than one child, this date might be when they all reach adulthood. Until this time, the trust's beneficiaries might enjoy occasional cash disbursements. Then, at the trust's closing, the trustee could distribute the principal assets to them. You can set these terms in your will and your executor would then include them in the trust documents when she creates the trust as part of the probate process.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.