What is a Testamentary Trust?

The variety of different types of trust can be confusing. Understanding which type of trust is the most beneficial in your individual circumstances can be hard, particularly as each has significant advantages and drawbacks. Living trusts are explored in detail throughout this section; they are potentially very useful, but their uses are limited to fairly specific circumstances. Testamentary trusts are an alternative to living trusts.

Testamentary and Living Trusts

Testamentary trusts are frequently defined by their distinction from living, or ‘inter vivos’ trusts. A living trust is, as the name would suggest, a trust that is established during the lifetime of the settlor. A testamentary trust, therefore, is a trust that is constituted on the death of an individual. Thus, the main impetus for their establishment tends to be drawn from a concern for the individual’s heirs, rather than limitation of tax liabilities or similar worries, which tend to inform the constitution of living trusts.

Most commonly, testamentary trusts are established as a result of an instruction given in a will. It is particularly common for testamentary trusts to be designed to benefit individuals who are not yet of an age at which they could manage assets that have been given to them in the will. A trust can ensure that those assets are safeguarded until such a time as the intended beneficiary is capable of dealing with them on their own.

Trustees

As the settlor of a testamentary trust is, by definition, deceased by the time the trust becomes active, they confer all powers of trusteeship to another individual. More often than not these trustees will be named in the will, or in a separate document attached to the will but dealing specifically with the provisions of the trust. Testamentary trusts place considerable importance on the judgement of the trustees

. Clearly, the settlor is incapable of directing the affairs of the trust. As a result, trustees must use their own discretion to manage the trust in a way that produces the maximum potential benefit to the beneficiaries. The settlor can, however, offer documented instruction or guidance regarding the way in which the trustees should act.

The settlor can provide binding instructions to trustees in the trust instrument (defined in an article elsewhere on this site), as well as non-binding guidance in a document known as a ‘letter of wishes’. The spirit of the latter document should be followed by trustees where possible.

Clearly, testamentary trusts are only efficient in certain circumstances. They are only funded upon the death of the testator, and are therefore ineffective if the purpose is, for example, mitigation of an income tax liability. However, they can be very useful in providing financial support to minors; trust terms can be written in such a way that, for example, infant dependants of a single parent are guaranteed an income in the event of the death of the parent.

Many people write their own wills, and many do it successfully. If you are considering making provision for a testamentary trust in your will, however, you should always seek professional advice as the process can be complex. Furthermore, the results of a failed testamentary trust can be financially devastating.