People are becoming more sophisticated about the type of trusts they are getting, so I don’t see as many testamentary trusts as I used to. But there are still lots of people with them who have told me their trust was going to avoid probate when they die. They were dead wrong.
A testamentary trust guarantees probate. A revocable living trust gives you, or rather your family, a shot at avoiding probate. However, the vast majority of folks that get a revocable living trust end up having to deal with probate, just like the folks that get a testamentary trust, because they didn’t use or fund the trust appropriately. So why get a revocable living trust, when it is usually cheaper to get a testamentary trust?
Thirty years ago, many lawyers would steer their clients toward a testamentary trust in preference to a revocable living trust. They made the argument that the testamentary trust was cheaper up front – was it really? They made the argument that the testamentary trust didn’t take any thought or effort to operate during their lifetime. They made the argument that the family would probably go through probate in either case, which was actually true.
And yet, everyone always says they want to avoid probate for their family. What’s the deal?
The word testamentary means relating to or the process of bequeathing or appointing through a will. A testamentary trust is established within a will. The testamentary trust is sometimes referred to as a “trust under will.”
Basically, all of the estate’s assets are passing under the will, which requires a probate proceeding – a complicated and expensive probate proceeding. A will has no legal power until the probate court gives it its power. Thus, everything is probated and then it is placed in the testamentary trust laid out in the will. This trust is actually established by the court using the terms outlined in the will. You may design the terms of the trust during your lifetime, but the trust is not established during your lifetime. It is an after death (testamentary) trust, not a revocable living trust.
Once the court establishes the testamentary trust and all of the assets are probated and placed into the trust, the assets are distributed to or held in trust for the benefit of the beneficiaries (heirs). Because the trust was created by the court, the court will have control over the trust forever.
Of course, this trust has to account to the court and be represented in court periodically or whenever the trust does something significant. Thus, the attorney has a long term employment opportunity. I have often called a testamentary trust “the attorney’s retirement plan.”
You can tell if you have a testamentary trust, because the document that created the trust will say “Will …..” on its face. If your trust is a revocable living trust, it will usually have the word “Living” or “Inter Vivos” in the title. Sometimes a revocable living trust may simply have the title of the trust, such as “The Jones Family Trust,” but the language in the trust document will start out in the present tense.
The revocable living trust is established during your life, not after your death, as a testamentary trust is. The revocable living trust will avoid probate, provided it is used properly. Most often the attorney or internet site that you use to establish your revocable living trust will not educate you on the “use” of your trust. I have a full series of YouTube videos and articles on how to use your revocable living trust to make sure it avoids probate. The revocable living trust kits I have include hours of audio instructions on how to use the trust. Even if you already have a revocable living trust, it is important to learn how to use the trust during your lifetime.
If you don’t use your revocable living trust because of ignorance, laziness, or stupidity, then you should have probably just gotten a testamentary trust and not fantasize about avoiding probate. The argument in favor of testamentary trusts is based on keeping the public ignorant. The solution to probate avoidance is education and the establishment of a good revocable living trust.
I was told I needed a testementary trust to avoid my disabled grandchild and husband from losing everything if they were on Medicaid. My grandson has muscular dystrophy and would not be living today without Medicaid. He is 7 and his pulmonary vest alone costs $7,000. He no longer uses a walker nor foot braces, but just as he needs the pulmonary vest for keeping his lungs clear, he needs speech and physical therapy to be able to continue talking and walking. His speech, even now, is very hard to understand. He is such a bright child and will most certainly become a contributing member of his community and state and country. But I am prepared to keep his assists in this trust to keep him on Medicaid. My husband has dementia (the football player’s type FTD). I am keeping him at home. IF one day he must go to a nursing home, I don’t want the $ that we have worked so hard for, to not be given to our grandchildren, 2 with muscular dystrophy, one with autism. I read this article and now I am confused. Should I have NOT gotten a testementary trust?
Angie,
A testamentary trust can be written so that it creates a special needs trust for the beneficiaries when you pass away. A special needs trust allows for money to be provided for a grandchild. It does not actually give the child the money but keeps the money in trust, and the trustee uses the money to help the child. This allows the child to continue to receive Medicaid but also have some extra from the trust. For your husband, having a testamentary trust may not qualify him for getting government help. The requirements for getting help are very stringent and have a look back period for assets that have been transferred to a trust.
We had a Revocable Family Trust created in 2009. In 2012 my son was a victim of a violent crime, wherein he will spend the rest of his life in a nursing home. We went to update our Revocable Trust, Our Financial Power or Attorney, Our Heathcare Directives, and our Last Wills and Testaments The new attorney changed the Revocable Family Trust (name excluded for privacy issues) to the X Family Revocable Living Trust. However, he put in the Last Wills and Testaments of BOTH MY HUSBAND AND MYSELF a Testamentary Trust should either myself or my husband become incapacitated. 1. My trustee, my daughter is the sole successor to the trust, should both of us pass. However, all assets have been transferred to the X Family Trust and then later..the X Family Revocable Living Trust. I think that means it is funded. If so…is this testamentary trust necessary in the last will and testament or will it confuse the judge. My son cannot have anymore than $2,000 in his name or he loses Medicaid. So..two issues, my son was disinherited in the first Trust, i.e., family trust and when rewritten into the Living Trust NOT MENTIONED except in a List required by said Living Trust. Is that sufficient and does the clock start ticking again for a five year lookback. Secondly…does that Testamentary Trust throw the entire Living Trust into Probate…SOMETHING I WISH TO AVOID. tHANK YOU.
Carolyn,
I don’t understand the issues, and this is a two hour discussion with an attorney that really knows the situation.
Hello Lee
I really appreciate what you are doing. One question, I and my wife have minor children. If we have a living trust which has been funded with all our assets and also have a provision of testamentary trust in our will, if both of us pass away, can the living trust be converted (or transferred) to the testamentary trust without probate? If some of the assets are not covered in the Living trust then will it affect the conversion process?
thanks
Palma,
The living revocable trust is the trust you want. Hopefully, the will will never be entered into probate, because your living revocable trust will own all of your assets that would need to be probated. The testamentary trust is created by the court as part of the probate process. You hope the testamentary trust is never used or sees the light of day. You should have a pour over will with your living revocable trust. I don’t think I have ever heard of a will that goes a long with a living revocable trust that creates a testamentary trust.