All You Need to Know About Testamentary Trusts

A testamentary trust is a trust created by your will that takes effect after your death. It is often used to hold an inheritance for minor children or for a beneficiary who needs help managing money, with a trustee handling the assets under your instructions.

Here is how a testamentary trust works, when it makes sense, and how it compares with a living trust.

How a Testamentary Trust Works

You write the trust terms into your will, including who the trustee is, who benefits, and when and how distributions are made. The difference between a will and a trust is the starting point: a testamentary trust uses a will to create a trust that begins only after death.

You, as the person making the will, create the trust, and the trustee manages it after your death. A trust is a relationship in which a trustee holds and manages property for the beneficiaries.

Benefits of a Testamentary Trust

• Protects young beneficiaries. Assets can be held until a child reaches the ages you choose.
• Flexible terms. You can create more than one trust in a will and set different terms for each beneficiary.
• Lower upfront effort. Because the trust is not funded during your life, there is nothing to retitle now.

Drawbacks to Consider

Except in limited cases, a will must be admitted to probate, informally by the registrar or formally by the court, before it is effective to transfer property.¹ A testamentary trust depends on that step, so it is funded through a court-supervised process after death.

A pour-over will combined with a living trust is one alternative for families who want more privacy.

Choosing between a testamentary trust and a living trust depends on your assets, your beneficiaries, and how much privacy you want. Johnson Law Group offers a no-pressure consultation to compare them, so schedule a consultation when you plan.

The Trustee’s Role

Choose a trustee who is organized, trustworthy, and willing to serve for years. Within 60 days after learning the trust exists, the trustee must notify the qualified beneficiaries of it and of their right to request trust information.²

You can also include a spendthrift provision so a beneficiary cannot transfer the interest and creditors generally cannot reach it before distribution.³

Testamentary Trusts and Taxes

A trust may have its own income tax reporting obligations once it is funded. Discuss the tax effects of your plan with an estate planning attorney and a tax professional.

Talk With a Colorado Estate Planning Attorney

A testamentary trust can give your family structure and protection without funding a trust during your life. Johnson Law Group is here to help.

The attorneys at Johnson Law Group help clients decide when a testamentary trust fits and will give you a clear read on the tradeoffs. Schedule a free consultation through our Colorado offices, and we will serve as your North Star from here.

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