Testamentary Trusts (In A Will)

An estate plan is necessary to ensure your loved ones are properly cared for following your death, but the world of wills, trusts, and estates can be confusing. Without legal training or experience, it can be difficult to know what estate planning structure is right for you.

A testamentary trust can be a powerful tool when planning for your future to ensure that your estate is managed according to your wishes.

What is a testamentary trust?

A testamentary trust is a type of trust that is created through the use of specific language in an individual’s Last Will and Testament (often called a “will”). Because an individual can update or amend their will at any time prior to death, the testamentary trust language only takes effect upon passing. Unlike revocable living trusts, which are formed and actually operate during a grantor’s lifetime, a testamentary trust is created at the time of death of the will maker, often called a decedent or testator.

The testamentary trust language usually provides highly detailed instructions as to how the deceased person’s assets should be distributed, managed, and any additional conditions or terms placed on the beneficiaries or trustee.

Benefits of A Testamentary Trust

Testamentary trusts offer multiple advantages over standard last will and testament documents, such as:

Controlling Distribution of Your Assets. This is particularly useful when the beneficiaries are minors, have special needs, or are otherwise incapable of managing large sums of money. It allows the testator to stipulate that assets distribute to beneficiaries at certain ages or upon the occurrence of specific conditions.
Protect Your Assets. Placing assets in a testamentary trust can protect them from creditors and legal claims made against your estate. This can be crucial for beneficiaries who might otherwise be at risk for losing their inheritance due to financial difficulties or legal issues. However, the best asset protection trusts are express trusts that are created before death; individuals with significant creditor concerns should use express trusts, such as an irrevocable living trust.
Tax Planning. Testamentary trusts offer tax benefits by potentially reducing the tax burden on the testator’s estate. There can also be an opportunity to minimize estate taxes and other related expenses, which may depend on the state’s rules in effect at time of the creation of the will or the time of death.
Flexibility. A high degree of flexibility comes with testamentary trusts. Specific instructions can be left for distributions, like requiring the beneficiaries to reach a certain age or achieve specific milestones. This allows for testamentary trusts to uniquely meet the needs of each individual testator.

Key Characteristics of a Testamentary Trust

Testamentary trusts have a few key features which make them different from other types of trusts and end of life documents, such as:

Established Through A Will. Testamentary trusts are always created through specific provisions within the Last Will and Testament of the testator. These provisions outline how the trust should be managed and distributed after the death of the testator.
Activated Post-Death with Probate. A testamentary trust only comes into effect after the death of the testator, meaning all assets of the deceased individual must go through probate before they go into the trust. However, the end result of a probate involving a testamentary trust is a court order that devises or directs the deceased individual’s assets into the newly-created trust. See our helpful guide to probate in Oklahoma for more information.
Managed By a Trustee. A trustee is appointed within the testamentary trust language to oversee the trust, manage its assets, and ensure the terms of the trust are fulfilled. The trustee has a fiduciary duty to act in the best interest of the beneficiaries and manage the trust assets according to the rules and terms that the testator used in their Last Will and Testament. See our article on picking a trustee for more information.
Beneficiary Provisions. Beneficiaries are either the individuals or organizations that are intended to receive the benefits of the trust. The terms of the testamentary trust will dictate how and when the beneficiaries will receive their distributions under the management of the trustee.

How to Create a Testamentary Trust

If you are considering establishing a testamentary trust, here are the essential steps to follow:

Assess Your Estate Planning Needs. It is important to evaluate your own estate planning needs and goals to determine whether or not a testamentary trust aligns with your own needs. Consider
factors like your beneficiaries’ needs, your preferences towards the timing and amount of asset distribution, and any other specific conditions you wish to impose.
Draft a Will Using Testamentary Trust Language. The first step in creating a testamentary trust is drafting the will that includes provisions allowing for the testamentary trust. The will should outline the terms of the trust, including the names of the beneficiaries, the trustee, and any specific
instructions for asset distribution.
Execute the Will. In order to make the drafted document effective, the will needs to be executed according to state law requirements. In Oklahoma, all self-proving last will and testaments require the testator to execute a physical copy of a will (no digital signatures) in the presence of witnesses. It is important to work with an experienced estate planning law firm to ensure the documents will be legally enforceable when the time comes.
Review and Update Periodically as Needed. Regular review of your will and trust terms are necessary to make ensure the document adequately addresses all necessary assets. This is especially important to do after major life changes, such as marriage, divorce, or the birth of children.

These rules are similar but not identical to the steps for creating an express trust in Oklahoma.

Two Main Types of Testamentary Trusts

There are many kinds of trusts that can be made into living or testamentary trusts, but there are two main types of testamentary trusts that are important to know: Family Trusts and Separate Trusts.

Family Trust. Also known as a family protection trust or “pot” trust, a family trust is designed to provide financial support to family members and manage familial assets based on the needs of each child. These trusts are commonly used by parents who want or need to leave more funds to one child, such as a child with special needs who requires additional financial support.

Separate Trust. Separate trusts allow for a specific trust to be established for each individual beneficiary. This trust is usually specifically applied to individuals with multiple children who wish to divide their assets between the children. Each trust is managed and distributed on an individual level, as opposed to all at once. When using separate trusts, the testator can elect to use similar trust terms and the same trustee.

Common Misconceptions About Testamentary Trusts

They are Only for Large Estates. False! Testamentary trusts can be beneficial for anyone who wants to ensure that their assets are managed and distributed according to specific instructions. They can be particularly helpful for managing assets of minor children, individuals with special needs, or even financially irresponsible beneficiaries. Whether or not someone should create a testamentary trust is more based upon the nature of the assets at issue rather than the size of the estate itself.
They are the Same as Living Trusts. Testamentary trusts differ from living trusts in that they do not offer benefits during the testator’s lifetime. Testamentary estates are created and established through the testator’s will and they will not come into effect until after the death of the testator. As a result, unlike living trusts, testamentary trusts, as a part of the Last Will and Testament, will not avoid probate. Living trusts can also be either revocable or irrevocable, while testamentary trusts, due to their nature as a piece of the testator’s will, are irrevocable once the testator dies.
They are Complicated to Set Up. Many assume that testamentary trusts are overly complicated and costly to set up. This could not be further from the truth. With the help of an estate planning attorney, testamentary trusts can be easily customized to your specific needs. They help minimize the total number of documents needed to plan an estate distribution.

Make A Testamentary Trust with an Oklahoma Trusts Attorney

Testamentary trusts serve as a powerful tool in estate planning. They provide a structured way to
manage and distribute your assets according to your wishes. Taking the time to set up a testamentary trust, or any other estate planning documents that may be advisable for your situation, can provide you peace of mind and secure your family’s future.

Work with the experienced and trusted estate planning attorneys at Avenue Legal Group to help guide you through the estate planning process with professionalism and personalized care.

Have Questions?