A testamentary trust is a trust that is created upon your death. Unlike an inter vivos (i.e., living) trust, which you must create, find, appoint a trustee, and designate beneficiaries for while you are still alive, a testamentary trust only springs into existence per the instructions outlined in your will. The will must also appoint the trustee and designate its beneficiary or beneficiaries.
Testamentary trusts are created and used for much the same reasons as living trusts. For example, they can be used to provide for your minor children or grandchildren until they reach a certain age, after which they will receive the remainder of the trust. Alternatively, they can be structured as spendthrift or asset protection trusts, where the trustee has discretion over how the trust’s income and principal are distributed to your beneficiary while shielding them from the claims of their creditors.
Testamentary trusts have several advantages over inter vivos trusts. For example, inter vivos trusts can be costly to set up and incur significant ongoing administration costs. These expenses are unnecessary if you only intend for the beneficiaries to start receiving disbursements from the trust once you die.
Furthermore, in some cases, the assets you intend to fund the trust with may only be accessed once you die, as is the case with life insurance or retirement accounts that are structured so that their funds are only disbursed upon your passing.
Example: You purchase a life insurance policy in the amount of $1 million for the benefit of your children so that they can be provided for after you die. However, you do not want them to have access to the entire amount at once. You include instructions in your will specifying that the proceeds of the policy should be placed in trust and appoint a financial institution to manage the funds and distribute a certain amount to each child until they reach the age of 21, after which they will each be entitled to a certain amount of the remainder of the funds.