Advantages & Disadvantages of Testamentary Trusts

Advantages & Disadvantages of Testamentary Trusts
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A testamentary trust becomes operational at the death of its creator, according to the Illinois Department of Revenue. Its formation is directed and specified in a last will and testament. It can be used to leave an inheritance for a minor child, and it can also be a way to deal with the proceeds of a life insurance policy.

How Testamentary Trusts Work

A testamentary trust is unique because, unlike a living trust, it's created at death according to a last will and testament. The will includes instructions for the executor of the probate estate to create the trust upon the grantor's death. This type of trust is automatically irrevocable because it doesn't go into effect until after death. The grantor therefore can't make any changes to it.

Testamentary trusts are commonly used to provide for child beneficiaries. Trust & Will indicates that there are two main types of testamentary trusts: family trusts and separate trusts.

A separate trust is set up for each beneficiary individually and managed individually. A family trust is one that outlines the distribution of assets among all named beneficiaries. A family trust is often established to provide extra for specific beneficiaries, such as a child, a relative with special needs or an elderly parent.

Testamentary Trusts Offer Simplicity

A testamentary trust established in your will is very simple to draw up, and it has few extra fees or costs associated with it, at least before the probate process begins. This is in contrast to a living trust, which can be quite costly in attorney fees, depending on the complexity of your situation.

Testamentary Trusts Provide Protection

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 have children of their own. The trust can be customized to follow your wishes.

Testamentary Trusts Offer Flexibility

Creating a testamentary trust instead of a living trust allows you to retain full control of your assets during your lifetime. You would effectively sign over ownership of those assets if you created an irrevocable living trust instead, and you cannot change your mind. The terms of a testamentary trust can be changed at any point up to your death simply by changing the terms of your will.

There's No Tax Advantage

Irrevocable living trusts can confer considerable estate tax advantages, and they're usually used for this reason. You retain full control of your assets and thus the full tax liabilities associated with them if you choose to create a testamentary trust instead.

Probate Isn't Avoided

A testamentary trust is created as part of probate, and probate can be a cumbersome process. This is in contrast to a living trust, which you establish during your lifetime. Property and assets are passed on to beneficiaries according to terms you've set in the formation documents, thus avoiding the need for probate. The assets have an alternate way to transfer to living beneficiaries. A testamentary trust doesn't come into being until after your death when your will is probated under court supervision.

The Role of the Trustee

One of the drawbacks of a testamentary trust is the considerable responsibility it puts on the trustee you name to manage it and oversee bequests after your death. This individual must meet regularly with the probate court to establish the formation of the trust and, depending on your wishes, their 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.

The Risk of Malfeasance

It can be difficult to remove a trustee after they're appointed. Your wishes may be at risk if the person you select turns out not to be up to the task, or even to be dishonest. The beneficiaries do have legal remedies, but these are costly and time-consuming, and the burden of proof against the trustee is quite high.