Testamentary Trusts: The Complete Guide

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Paul Sundin, CPA

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Testamentary trusts are trusts that spring into being at the time of the grantor’s death. A testamentary trust is usually created according to the terms of the grantor’s last will and testament. A testamentary trust can be funded with property from the grantor’s estate or potentially with property, such as life insurance proceeds, directed into the trust by a beneficiary designation.

There are both tax and non-tax reasons for creating testamentary trusts. The primary non-tax purpose for creating a testamentary trust is to provide for the management and safeguarding of property that one desires to leave to a minor or another individual who may not be mature enough to manage their inheritance on their own. If a person leaves property directly to a minor beneficiary, a court­ appointed conservatorship will be necessary. 

A conservatorship involves the specific appointment of a conservator by a judge and the court’s supervision of the conservator’s actions until the minor reaches the age of majority. At this time, the property held in the conservatorship is distributed outright to the beneficiary. This is a cumbersome, expensive process, and once the beneficiary reaches the age of majority, typically 18, the property they receive is entirely theirs to do with what they wish.

Therefore, anyone intending on leaving property to minor beneficiaries should create a testamentary trust so that they can choose the person or entity who will act as the trustee to manage the property on behalf of the beneficiary and to designate the ultimate age or ages that the property will be distributed to the beneficiary.

I prefer that the trustee make all decisions regarding management and distribution of trust property until the beneficiary has reached at least 25. It may be advisable to allow the beneficiary the right to withdraw a certain percentage of the trust property at that age. It also may be a good idea to enable the beneficiary to become a co-trustee of the trust.

I also believe it is prudent to stage property distributions to the beneficiary over various ages and percentages instead of one distribution of the entire property held by the trust. In this fashion, even if the beneficiary does not make good decisions following the first distribution, they will not have squandered all of the trust property. Hopefully, they will have learned a lesson that won’t be repeated following subsequent distributions.

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Estate CPA

Gilbert, AZ