A testamentary trust is a trust that becomes operational on the death of its creator -- it is described and specified in his will. It can be a way to leave an inheritance for a minor child. It can also be a way to deal with the proceeds of a life insurance policy. The trust is overseen by a trustee who is guided by the terms of the will in carrying out the wishes of the settlor. It stands in contrast to a living trust, which is established during the creator's lifetime.
A testamentary trust established in your will is very simple to draw up, and has few extra fees or costs associated with it, at least before the probate process. This is in contrast to a living trust, which can be quite costly in attorney fees, depending on the complexity of your situation.
A testamentary trust provides protection for assets you wish to pass to your descendants in the manner you want. It can remain in force for as many years as you specify, until the children have grown, or married or had children of their own. The trust can be customized to follow your wishes.
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Creating a testamentary trust, instead of a living trust allows you to retain full control of your assets during your lifetime. If you create a living trust instead, you have effectively signed over those assets, and you cannot change your mind. The terms of a testamentary trust can be changed at any point up to your death.
No Tax Advantage
Living trusts usually confer considerable tax advantages during your lifetime, and are usually used for this reason. If you choose a testamentary trust instead, you retain full control of your assets and thus the full tax liabilities associated with them.
A testamentary trust does have to pass through probate, which can be a cumbersome process. This is in contrast to a living trust, which you establish during your lifetime. Property and assets are passed into a living trust under your supervision, thus usually avoiding the need for probate. A testamentary trust does not come into being until after your death, at the time that your will is probated under court supervision.
One of the drawbacks of a testamentary trust is the considerable responsibility it puts on the trustee. He must meet regularly with the probate court to demonstrate his safe handling of the trust, and depending on your wishes, his tasks may go on for many years. It can be hard to find a person who is both willing and capable of carrying out such a charge.
Once a trustee is appointed, it is difficult to remove her. If therefore, the person you selected turns out not to be up to the task, or even to be dishonest, your wishes may be at risk. The beneficiaries do have legal remedies, but these are costly and time-consuming, and the burden of proof against the trustee is quite high.