MSU Extension: Testamentary Trusts Have Advantages

A testamentary trust is one that is set up according to the instructions contained in a last will and testament. The owner’s property, such as stocks, bonds, mutual funds, home, bank or credit union accounts, and certificates of deposits, must first pass-through probate or bypass probate by naming the testamentary trust as the beneficiary. A will is an instrument that sets up the testamentary trust, however, so the will must go through the probate process.

According to Marsha Goetting, MSU Extension family economics specialist, the personal representative appointed by the district court transfers the title of the property from the deceased’s name to name of the testamentary trust. The will maker, called a settlor, names a trustee to manage the assets on behalf of the beneficiaries.

“The settlor can change the terms of the testamentary trust at any time before death by making a new will or adding a codicil to the existing will,” Goetting added. “A codicil is a supplement, amendment, or addition to a will. The codicil may explain, change, add to, subtract from, qualify, alter or revoke provisions in a will.”

“Montana law allows minor children to inherit property. However, if the property needs management while the child is still a minor or if the child inherits more than $5,000 the district court appoints a conservator. The conservatorship ends when the minor child reaches age 18 and the conservator releases the property to them,” said Kaleena Miller, MSU Extension Madison Jefferson County Agent.

“Some parents and grandparents consider 18 to be too young to take control of a considerable sum of money or other property. These relatives may choose to leave assets in a testamentary trust for the child’s benefit,” Goetting said. “Then the trustee can give the money or property later at an age when the child achieves financial maturity. Or the settlor could have stated in the will for the child to have part of the money at age 35 and the rest at age 45.”

Another use of a testamentary trust is for a caregiver spouse. A caregiver may create a testamentary trust in the will and name a trustee. The trustee manages the assets of a surviving spouse who does not have the mental capacity to make financial decisions. The trustee can also use the funds to pay for health insurance and living costs for the surviving, disabled spouse.

A settlor outlines the terms of a testamentary trust in a written will. The settlor can specify who will be the trustee(s) and the successor trustee(s) to manage the testamentary trust assets. The settlor can also choose the beneficiaries who receive money or other property from the testamentary trust. The settlor can say whether the beneficiaries receive only the interest on the trust investments or whether the beneficiaries also may receive principal (assets) under stated circumstances. And finally, the settlor can say who are the beneficiaries (persons or organizations) to receive the testamentary trust assets when the trust ends.

If the settlor plans to give the trustee broad authority in the will, the settlor could have a face-to-face discussion with the trustee. This conversation could help the trustee understand the settlor’s preferences for education for example. Did the settlor mean for the funds to be used for higher education at a university, technical school, or beauty college? Or did the settler tell the trustee to make a decision in the child’s best interest?

If the settlor names more than one person as a trustee, they become co-trustees. The written will should say whether co-trustees can make decisions individually or whether they must agree on decisions. Also, the will should say whether the decisions must be unanimous or by majority rule. If one co-trustee dies, the other one(s) will assume all responsibilities. The settlor should name at least one successor trustee in the will. This person takes over only if the trustee named first resigns, can no longer fulfill the role, or dies.

More information about testamentary trusts is available in a MontGuide, “Testamentary Trusts in Montana” The fact sheet is available at the MSU Extension Madison-Jefferson County Office. Call 406-287-3282 or download at https://store.msuextension.org/publications/FamilyFinancialManagement/MT202113HR.pdf