Legal Definitions - testamentary trust

A testamentary trust is a legal arrangement for managing assets that is established within a person's last will and testament. Unlike trusts created during a person's lifetime, a testamentary trust only comes into existence and begins to operate after the person who created the will (known as the testator) has passed away. It outlines how specific assets will be held and managed by a designated trustee for the benefit of particular individuals or causes, according to the testator's instructions.

Here are some examples to illustrate how a testamentary trust works:

• Example 1: Providing for Minor Children

  Sarah, a single mother, wants to ensure her two young children are financially secure if she passes away before they reach adulthood. In her will, she specifies that upon her death, a trust should be created. This trust will hold her assets, and a named trustee (her sister, Emily) will manage these funds for the children's education, healthcare, and living expenses until they each turn 25. At that age, they will receive their share of the remaining trust assets outright.

  This illustrates a testamentary trust because the trust itself does not exist during Sarah's lifetime. It is explicitly created by her will and only becomes active and legally binding after her death, with Emily then taking on the role of trustee as directed by the will.

• Example 2: Supporting a Beneficiary with Special Needs

  David has an adult son, Michael, who has a disability and relies on government benefits for his care. David wants to leave a substantial inheritance to Michael but is concerned that a direct inheritance could disqualify Michael from receiving essential public assistance. In his will, David establishes a "Special Needs Trust" that will be funded upon his death. This trust names a professional trustee to manage the funds, which are to be used for Michael's supplemental needs (such as specialized equipment, recreational activities, or therapies not covered by government programs) without directly providing him with income or assets that would affect his benefit eligibility.

  This is a testamentary trust because its formation and terms are entirely dictated by David's will. It only comes into effect and begins to operate after David's passing, ensuring Michael's financial well-being according to David's specific instructions, while also protecting his eligibility for other support.