In a prior blog, I discussed trusts that can be established in a grantor’s lifetime. In this blog, I’ll discuss trusts which are established after the grantor dies: a testamentary trust. These trusts take their name from the fact that they are established by the grantor’s Last Will and Testament. The purposes of these trusts are to prevent a beneficiary from squandering their inheritance as well to make sure the beneficiary has access to the funds for reasons that the grantors specifies (like education or health care needs).
Choosing a trustee for a testamentary trust can be a tricky thing. Because they only come into existence after the grantor dies, the Will should specify who will act as trustee. Although our clients sometimes want family members to be trustee we recommend that they chose a financial institution (bank’s trust department) to act as trustee for several reasons:
- Banks often have greater access to investments to increase the value of the trust than family members;
- Banks often have greater financial expertise than family members;
- Banks have insurance and bonding in place in the event there are problems in the administration of the trust;
- In the event there is a disagreement between the beneficiary/beneficiaries and the Banks, there will still be harmony in the family (the children of a child are not mad at their Uncle).
As indicated above, a primary reason for establishing a testamentary trust is to protect/preserve a bequest until a beneficiary is capable of using good judgment. Accordingly, the beneficiaries are normally described by age. Example: if any beneficiary is under the age of 30 their share will be held in trust.
Until they reach the specified age(s) of distribution, the trustee is charged with investing the assets and spending the assets on behalf of the beneficiary in ways specified by the deceased grantor. Example: the Trustee shall expend such sums from the principal or income from the trust as shall be necessary to pay for the education, health care needs, and reasonable living expenses. This raises difficult questions and drafting problems. How much discretion should a trustee be authorized to exercise? Stated alternately, how should a testamentary trust be drafted so that it is unduly restrictive but provides sufficient guidance for the exercise of the trustee’s authority? We attempt to ameliorate this problem by including a set of “principles” to provide direction to the trustee.
To quote the poet, sage and philosopher, the late, great, George Harrison: “all things must pass.” In the current context, this means that at some point the trust must terminate and distribute the principal to its beneficiary(ies). This can be any age, or any set of conditions. We recommend that there be at least two distributions at least several years apart. This allows a beneficiary to “mature” and/ or recover from a previous lapse of judgment.
Although testamentary trusts are often used to preserve a bequest for an underage/inexperienced beneficiary, it is also common for a testamentary trust to be established to protect a bequest to a surviving spouse. In these marital testamentary trusts, the surviving spouse receives all of the income of the trust for their life (distributed at least annually), and the right to distribution of principal in the event of need (health care, maintain standard of living), but any principal remaining at the surviving spouse’s death goes to the children.
We normally include a testamentary trust in every Will we draft for our clients. Jason Bourne, who created so many (fictional) widows and underage beneficiaries, wouldn’t need a testamentary trust, but if you have a “real life” spouse and/or children you should consider including a testamentary trust in your Will.
If you, or someone you know, are in need of legal services regarding estate planning please feel free to contact the Kreamer Law Firm, P.C. through our website or by calling 515-727-0900.
