A trust is the most popular way to transfer assets to future generations with a plan for management of those assets beyond multiple lifetimes. More specifically, a trust is a private contract between (i) the settlor or creator of the trust, and (ii) the trustee of the trust, i.e. the party designated by the settlor to manage property conveyed to trust for the benefit of the trust beneficiaries.  If the trust is a separate standalone document and is created during the settlor’s lifetime giving settlor the ability to amend the trust, the trust shall be considered an inter vivos trust, i.e. trust of a living person, more commonly known as a revocable living trust. 

If the trust is incorporated into the settlor’s Last Will and Testament, the trust is deemed a testamentary trust, i.e. trust born under a Will.  A testamentary trust must be administered by the probate Court to enforce its terms.  Because a testamentary trust must be administered by the probate Court to enforce its terms, a properly drafted testamentary trust must specify how to manage assets conveyed to trust after the settlor’s death.  It shall also provide instructions on how to transfer title to and how to direct the use of assets for benefit of the trust beneficiaries.  Because testamentary trusts are within a Will that is not deposited with the Court until after the settlor dies, testamentary trusts do not have legal effectiveness unless and until the Last Will with testamentary trust is admitted or otherwise proved to the probate Court.

When Should I Establish a Testamentary Trust?

While there is a premium cost to be paid to settle a revocable living trust, the cost to implement a Last Will with testamentary trust is typically more reasonable. Further, the costs to administer a testamentary trust after decedent’s death can be paid from the decedent’s estate. Further, if the settlor later chooses to settle a revocable living trust, he or she can easily amend their Last Will to remove the terms of the testamentary trust first created.

All that being said, the most common scenarios for use of testamentary trust planning are as follows:

• Trust beneficiaries are minors or disabled.  The beneficiaries of the trust are young children under eighteen (18) years old, disabled adults or beneficiaries with special needs or special care circumstances.

• Trust beneficiaries lack financial savvy.  The beneficiaries of the trust are due to inherit a large sum of money and are anticipated to be incapable of managing their financial affairs.

• Trust beneficiaries need Court oversight.  Whether the settlor of the trust has limited or substantial assets, they may want or need to involve the probate Court judge to hold the trustee accountable while administering the trust for a spendthrift or substance using beneficiary.

• Trust assets are shared between individual and charitable beneficiaries.  When the beneficiaries of the trust include both family members and a charitable organization, a testamentary trust can be used to properly manage, control and distribute trust assets in furtherance of settlor’s planning goals.

How Does a Testamentary Trust Work?

A testamentary trust is created from the terms within a settlor’s Last Will and Testament.  Because a testamentary trust is considered part of the settlor’s Will and does not legally exist until after the settlor’s death, the trust within the Will must be authenticated by the probate Court before it can be administered by the Court for the benefit of the trust beneficiaries.  More often than not, a beneficiary, trustee or personal representative of the estate will retain probate counsel to represent them before the Court, i.e. to probate settlor’s estate and administer the Last Will.  Once the Will with testamentary trust is admitted to probate, those assets remaining in settlor’s individual name at time of death will be transferred under the Court’s purview pursuant to terms of the trust.

How Does a Testamentary Death Trust Protect the Best Interests of its Beneficiaries?

In order to protect the best interest of the trust beneficiaries, the settlor will need to create a set of predetermined trust instructions and detail them within the settlor’s Last Will. Those instructions should appoint a trustee (and designate an alternate successor trustee) to carry out the settlor’s instructions for the benefit of the trust’s beneficiaries. One example includes inserting provisions allowing the settlor to control the timing of distributions from trust upon the occurrence of specific events or milestone achievements, e.g. 1/3rd balance payable upon beneficiary’s graduation from college or admission to post-graduate school.

If the grantor is concerned about distributing to a wasteful spendthrift beneficiary, the settlor may include provisions allowing the trustee to release payment distribution of qualified expenses directly to payees of the beneficiary.  Trust provisions can also set parameters that dictate how and when the trustee is authorized to distribute.  If the settlor needs to limit the term of the trust or define the trust term, the settlor can state how long trust assets will be managed by trustee before being released to beneficiaries, e.g. 1/3rd balance payable to beneficiary at time the trust beneficiary turns 30 years old.

What are the Pros and Cons of Testamentary Trust Planning?

The benefits of establishing and funding a testamentary trust are many. Here are a few of the primary advantages of testamentary trust planning:

The Pros:

• Less Complex to Prepare than Living Trusts.  Unlike a revocable living trust, the terms of a testamentary trust are more concise and simplified than that of their revocable living trust counterparts. Testamentary trust terms can be added to a Last Will and Testament and do not require a separate standalone trust document to be created.

• Less Costly to Establish than Living Trusts.  Unlike a revocable living trust, the cost to prepare a testamentary trust is modest in comparison and less time consuming to draft than that of a revocable living trust. Testamentary trusts also do not need to be funded at that time they are created unlike a revocable living trust which assets must be assigned to trust during the settlor’s lifetime.

• No Required Transfer of Assets to Trust During Life.  Unlike a revocable living trust, the testamentary trust does not have to be funded with assets during the life of the settlor. After executing a Last Will with testamentary trust, the settlor does not have to retitle any of their assets nor deed any real property into trust.

As one might anticipate, there are certain drawbacks to settling and funding a testamentary trust. Although it may depend on your specific planning circumstances, here are some of the disadvantages of testamentary trust planning:

The Cons:

• Testamentary Trusts Must Be Probated.  The interpretation and supervision of the Last Will’s terms fall under the direction of the probate Court judge. To initiate the probate administration process, any interested party of the settlor’s estate can initiate a petition to the probate Court. Further, the party in possession of the decedent’s Last Will with testamentary trust provisions must deposit it with the Clerk of Court for the Judge’s consideration. 

• Probate is Time Consuming.  Without initiating the probate administration process, decedent’s probate assets cannot be distributed to or retitled into the name of the trust or the trust beneficiaries. Because the probate administration process can take anywhere from several weeks or several months to one year complete, the decedent’s trust beneficiaries may not receive income or assets for an extended period of time after decedent’s death during the estate administration. 

• Trust Privacy is Lost.   Because a Last Will and Testament with testamentary trust becomes subject to the purview of the probate Court in the decedent’s County of residence, the trust terms do not remain confidential and become a matter of public record. For this reason, the identity of the trustee and trust beneficiaries do not necessarily remain anonymous.

• Last Will Must Be Authenticated.  The decedent’s Last Will and Testament with testamentary trust must be properly executed and witnessed in accordance with Florida’s strict execution formalities laws. If the Last Will is not authenticated by the Court due to improper execution formalities, there is a chance the Court will not admit the Will to probate and that the decedent’s testamentary trust planning intentions will not be carried out.

• Testamentary Trusts Take Time to Fund. Because the decedent’s Last Will with testamentary trust is not legally valid until the Last Will is authenticated by the Court, the trust cannot be funded, i.e. assets retitled into trust, or otherwise retitled or distributed unless and until the Court otherwise approves.  Further, Florida’s creditor claim period may further delay anticipated asset retitling or distribution at least 3 months and until creditor claims against the Estate are resolved.

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