Testamentary Trust

A Brief Introduction About the Testamentary Trust Agreement

What is a testamentary trust? To understand a testamentary trust, let’s first understand what ‘trust’ means. Trust is built when a person transfers property to a ‘trustee’ who will use the said property for the benefit of a third party, who is also known as the beneficiary. A trust can be created by a living person too. However, when a person dies and mentions the creation of a belief in the will, it is known as a testamentary trust or will trust or trust under a will or testamentary letter. The term testamentary is defined as something that is ‘bequeathed to or appointed through a will.’ The testamentary definition explains the document well.

Will trust arises only upon the death of a person. It is enacted according to the instructions written in a deceased’s will. A will can have more than one such trust. The testamentary letter is a legal document establishing a fiduciary relationship. Is a testamentary trust revocable or irrevocable? The trust is irrevocable after the person who created it has passed away. In a person’s lifetime, it can be revoked.

There are two types:

A discretionary trust, which allows the beneficiary the option to take part or all of the inheritance and the power to remove or appoint a trustee.
Protective trust where the beneficiary must take their inheritance via a trustee, without the power to appoint or remove one.

The trust is created by the executor of the will, and the duties of the trustee start only after the executor of the will has done their work to set up the trust.

Who Takes the Testamentary Trust Agreement?

The agreement is taken by the person who wants to create the trust, in his/her lifetime, to be enacted upon after his death. The testamentary trust document is not a separate one; the instructions about its enactment are included in a person’s will.

Generally, there are three parties to the agreement:

The settlor or trustor: The person who creates the trust in his will in his lifetime.
The trustee: Is the person who is entrusted to use the property listed in the will for the benefit of a third party.
The beneficiary: Is the person who stands to benefit from the trust created in the will.

Apart from the three parties, the involvement of the probate court is a must to oversee how the trust is being handled after the trustor has passed away.

Purpose of the Testamentary Trust Agreement

The legal arrangement of a testamentary trust is created to address the estate of the person after his death to ascertain the terms through which the said estate can be used for the benefit of the beneficiary. It allows a settlor to exercise control over his/her properties, post-mortem through a trustee, and to set a time period when the beneficiary will inherit his/her estate. Even though the trustee can exercise his/her discretion in carrying out the will, the settlor can leave a letter of wishes if a settlor wants the trust to be occasioned in a specific manner.

It allows:

Flexibility to the settlor on how his/her assets are distributed.
Protects the deceased estate as it is a part of a trust.
Creates provisions for testamentary transfer.
Allows the beneficiary to reduce his/her tax liability.

Contents of the Testamentary Trust Agreement

A testamentary trust must mention the following things:

The name, address, age, and contact numbers of the settlor, the trustee, and the beneficiaries.
The list of debts, if any.
The kind of trust it is – discretionary or protective. It should list the powers of the beneficiaries in relation to the appointment of the trustee.
The complete list of properties or assets that will be governed as a trust.
The time period for which the trust shall stand, for example, until the beneficiary turns 21.
If there are multiple beneficiaries, then the percentage of proceeds that will go to each beneficiary should be mentioned.
If there is a letter of wishes about how the trust is to be managed by the trustee, it can be a part of the trust in the will.
If any payments are to be made to the beneficiaries, then the amount, frequency, and mode of payments are mentioned.
Include sub-trusts, if needed.

How to Draft the Testamentary Trust Agreement?

These details must be kept in mind while drafting the agreement:

The wishes of the settlor are clearly conveyed through the wordings in the will, with no scope for anything ambiguous. It is advisable to draft a letter of wishes. The intention of the settlor is of utmost importance.
It must contain distribution provisions about how to handle the proceeds of the estate of the settlor.
While listing the assets of the settlor and in case the assets are immovable properties, the address, area, and current market value of the property must be mentioned.
It must contain a list of beneficiaries along with their details and mention their relationship with the settlor in detail. It must also mention if any heir or family member is specifically excluded.
It must be in accordance with the law, and nothing illegal should be included as an asset.
While drafting, the details about the trustee and whether the trustee is a natural person, a business entity or a public body must be clearly written. It should also mention the name of a second person who will take over the duties as a trustee if the first person is unable or unwilling to execute their duties as a trustee.
It should contain a clause that mentions that all the beneficiaries will have the right to nominate a trustee if both the trustees mentioned in the will are unable or unwilling to act as trustees.

Negotiation Strategy

The beneficiaries are generally not informed about their inheritance until a person passes away. So, negotiation strategies cannot be employed before the testamentary trust is enacted upon. Once it is enacted, a trustee and the beneficiaries can negotiate as. Usually, the trustee has the power to exercise discretion unless a specific letter of wishes has been given by the deceased.

Benefits & Drawbacks of the Testamentary Trust Agreement

Benefits:

It provides protection to the assets of the deceased.
It provides flexibility in relation to the way the assets are utilized after a person’s death.
It has low upfront costs as it is a provision in the will.
Testamentary trust taxation laws are in favor of the beneficiaries.
The probate court oversees the handling of trust.
It offers protection of the assets from the creditors.

Drawbacks:

It is a time-consuming process for the trustee as the trustee is required to meet with the probate court regularly.
It creates a long-term legal liability for the trustee.
The costs that are incurred as court fees at a later stage can get expensive.
The trustee/s mentioned in the will may refuse to take on the role, leaving the duty of the appointment of the trustee in the hands of the beneficiaries who may not exercise power judicially.
It may become difficult for the beneficiaries to bring a dishonest trustee for malfeasance(1) to account as the process is time-consuming.

What Happens in Case of a Violation?

If a trustee violates the terms of the will, he/she can be held personally liable for the same, and if there has been malfeasance about money, the funds can be recovered from him/her by filing a suit in court.

How is a Testamentary Trust Different From a Living Trust?

A living trust is made by a person during his/her lifetime, but a testamentary trust is created by a person’s will after his/her death. The latter comes into existence only after the person has passed away and is irrevocable trust after the person’s death.

A testamentary letter is a blessing for those who want to protect their estate after death and wait for a certain duration of time before letting their beneficiaries inherit their estate. A lot depends upon the trustee who is nominated by the settlor. If a dishonest trustee is nominated, the intention of the deceased by setting up such a trust may be defeated. An honest trustee might carry out the wishes of the deceased to the letter.