This article was originally published as part of our series on trusts in the Dominion Post, Senior Post special. Check back each month to stay up to date as we release each article from this series!
Last month we introduced the topic of trusts promising we would learn more about various types of trusts in upcoming articles. This month we are focusing on the testamentary trust. The testamentary trust is often created by the last will and testament. For a will to create a testamentary trust it must include provisions for the management of all or part of an inheritance.
While an outright distribution of inheritance is the most straightforward option, there are many reasons why an outright distribution may not be the best decision. For example, a potential beneficiary who is a minor cannot legally manage their own finances. Even adult beneficiaries may need a testamentary trust since it is common for either a beneficiary or the spouse of a beneficiary to be poor money managers. In addition to poor money management issues, there may be concerns regarding the beneficiary’s creditors, potential divorce, drug use, or even concerns of a disability now or in the future that prescribe a testamentary trust. These types of concerns usually indicate that a protective testamentary trust is the best option to provide controlled access to the assets.
Even when there is not a specific concern regarding an outright distribution to a beneficiary, it can still be a wise decision to protect the inheritance from unanticipated risks. In contrast to the protective testamentary trust, a discretionary testamentary trust permits the beneficiary to decide whether they wish to take all or part of their inheritance via a testamentary trust. If the beneficiary decides to utilize a discretionary trust, they have the power to remove or appoint a trustee, and they can even appoint themselves as trustee. Once parents and their children consider the risk of the child losing their inheritance due to lack of protection, they often agree a discretionary testamentary trust is the best solution.
Since testamentary trusts are used to achieve the decedent’s goals, it is extremely important for the drafter of the will to understand those goals and to have sufficient knowledge of trusts. The appropriate level of detail should be included in the documents to describe those goals and to specify how the testamentary trust will be managed for the benefit of the beneficiary. While a concise description might seem easier to most non-attorney individuals, important terminology and clear directives in these legal documents can be very important to achieve the decedent’s wishes.
In addition to a will, a testamentary trust may also be created by an existing trust. A critical difference between a testamentary trust created by a will and one created by an existing trust, is a will must be probated which takes at least several months thus delaying the creation of the testamentary trust. In addition, the personal representative may wish to seek legal counsel for advice on how to properly set up the trust. And there is the possibility that the probate court will require annual accountings, which could significantly add to the administrative costs over time.
For those who wish to keep things simple, they may prefer to create a living trust during their lifetime to avoid probate and potential administrative costs, while expediting the creation of the testamentary trust for their loved one. In next month’s article, we will focus on these revocable living trusts; therefore, it may be useful to save this article to refer back to it at that time.