A trust gives the benefit and enjoyment of property to others even though it is legally owned by another party. A testamentary trust becomes effective after the death of its creator. It's formed under the terms of their last will and testament. This tool can be an important strategy in estate planning.
Acting as Trustee
An individual might establish a testamentary trust that will allow a trustee to distribute the deceased’s assets to the appropriate beneficiaries. The testamentary trust isn't created until after the person has passed away so it's a matter of probate, according to the American Bar Association. A testamentary trust can contain all or a portion of the person’s assets as outlined in the person’s last will and testament.
A testamentary trust can't be used to avoid probate because it's formed as part of the probate process. It won't escape estate tax liability on the assets because they're still owned by the decedent at the time of their death. But it can be used to assure professional management of the assets.
One thing that makes a testamentary trust different from other types of trusts is that it can have a termination date. You could set up a testamentary trust to distribute a small amount of money to minor children until they reach the age of majority. The trust would dissolve at that time, and they could collect any remaining funds.
Dissolving a Testamentary Trust
All you have to do is create a codicil to your will, deleting the instructions to set up the testamentary trust, if you decide that it doesn't suit your purposes after all. But it's important to have an attorney draft the codicil so you're sure it contains the correct language. Your will is considered to be amended when it and the codicil are filed with the court to open probate after your death.
The trustee you've named for your trust will be responsible for dissolving it after your death, according to the American Bar Association. The duties of the trustee include administration of the trust, liquidation of assets, disbursement of funds to the appropriate beneficiaries, and, finally, dissolution when this has been accomplished.
The testamentary trust becomes irrevocable when its creator is deceased, which means that it cannot be modified at that point and must be carried out exactly as written.
Steps to Take to Dissolve a Testamentary Trust
The first thing you should do is contact an attorney who specializes in these matters when someone has died and has named you as trustee of their testamentary trust. Laws can differ from state to state so you'll want to make sure that the paperwork is filed correctly. You could break the terms of the trust otherwise.
Here are the steps you can expect once you have hired an attorney:
- Examine the will. The first thing an attorney will do is examine the will for any obvious purpose, such as if it specifies a certain waiting time before the funds can be distributed to beneficiaries.
- Obtain consent of beneficiaries. If terminating the trust does not violate any language contained within it, the beneficiaries will be notified of any intention to terminate the trust.
- Wait for the court examination of the trust. The court will determine if the interests of all beneficiaries have been satisfied.
- Provide an accounting of the trust. The court will next require a written accounting of the assets and an inventory of the trust. The court might terminate a trust if the debts of the trust are high when compared to its assets.
- Prepare a termination petition. The procedures for doing this vary by state, but the next step is to prepare a termination petition and gather the supporting evidence for terminating it.
- Attend the hearing. You must attend the hearing scheduled by the court and present your evidence supporting the termination of the trust. The court will determine if it agrees with the termination of the testamentary trust.
It is important to contact an attorney and follow all procedures in your state when terminating a testamentary trust.
- Keep a clear written record of every action taken in connection with the dissolution and termination of the trust. Keep copies of all conveyance documents used to liquidate property from the trust, and retain a copy of the trust dissolution paper signed by the trustee. Also, keep a copy of all letters of notification to the beneficiaries, account holders, and other interested parties. Have a copy of the original trust agreement in the same file.
- A trustee who dissolves a trust without proper authorization, or in the wrong manner or at the wrong time, can face potential legal penalties for breach of fiduciary duties. If you are a trustee and you are uncertain whether you have authority to terminate the trust, or you are uncertain as to the proper procedure, consider consulting with a local estate planning attorney. You could be held personally responsible if you are found to have breached a fiduciary duty as trustee.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.