A testamentary trust is a trust

Trust law

In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...

 which arises upon the death of the testator

Testator

A testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death. It is any "person who makes a will."-Related terms:...

, and which is specified in his or her will

Will (law)

A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his/her estate and provides for the transfer of his/her property at death...

 (testamentary trust literally means a trust in a will). A will may contain more than one testamentary trust, and may address all or any portion of the estate.

Testamentary trusts are distinguished from inter vivos trusts, which are created during the settlor's lifetime.

There are four parties involved in a testamentary trust:

• the person who specifies that the trust be created, usually as a part of his or her will, but it may be set up in abeyance during the person's lifetime. This person may be called the grantor or trustor, but is usually referred to as the settlor;
• the trustee
  Trustee
  Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
  
  , whose duty is to carry out the terms of the will. He or she may be named in the will, or may be appointed by the probate court which handles the will;
• the beneficiary(s), who will receive the benefits of the trust;
• Although not a party to the trust itself, the probate court is a necessary component of the trust's activity. It oversees the trustee's handling of the trust.

A testamentary trust is a legal entity created as specified in a person's will, and is occasioned by the death of that person. It is created to address any estate accumulated during that person's lifetime or generated as a result of the death itself, such as a settlement in a wrongful-death suit, or the proceeds from a life insurance

Life insurance

Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...

 policy held on the settlor. A trust can be created to oversee such assets. A trustee is appointed to direct the trust until a set time when the trust expires, such as when minor beneficiaries reach a specified age or accomplish a deed such as completing a set educational goal or achieving a specified matrimonial status.

For a testamentary trust, as the settlor is deceased, he or she will generally not have any influence over the trustee's exercise of discretion, although in some jurisdictions it is common for the testator to leave a letter of wishes

Letter of wishes

A letter of wishes is a non-binding indication by the settlor of the manner in which he wishes the trustees to exercise their discretion in relation to a discretionary trust....

 for the trustee.

In practical terms, testamentary trusts tend to be driven more by the needs of the beneficiaries (particularly infant beneficiaries) than by tax

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 considerations, which are the usual considerations in inter vivos trusts.

If a testamentary trust fails, the property will usually be held on resulting trust

Resulting trust

A resulting trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor...

s for the testator's residuary estate

Residuary estate

A residuary estate, in the law of wills, is any portion of the testator's estate that is not specifically devised to someone in the will, or any property that is part of such a specific devise that fails. It is also known as a residual estate or simply residue. The will may identify the taker of...

. Many famous English trust law cases were on behalf of the residuary legatees under a will seeking to have testamentary trusts declared void

Void (law)

In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....

 so as to inherit the trust property (the most famous, or infamous, example of which is probably Re Diplock [1941] Ch 253, which resulted in the suicide of one of the trustees who was personally liable to account for trust funds that had been disbursed for what he thought were perfectly valid charitable trust

Charitable trust

A charitable trust is an irrevocable trust established for charitable purposes, and is a more specific term than "charitable organization".-United States:...

s).

Advantages of a testamentary trust

• A testamentary trust provides a way for assets devolving to minor children to be protected until the children are capable of fending for themselves;
• A testamentary trust has low upfront costs, usually only the cost of preparing the will in such a way as to address the trust, and the fees involved in dealing with the judicial system during probate.

Disadvantages of a testamentary trust

• The trustee is required to meet with the probate court regularly (at least annually in many jurisdictions) and prove that the trust is being handled in a responsible manner and in strict accordance with provisions of the will which created the trust. This may involve considerable legal fees, especially if the trust endures for several years or involves a sophisticated financial or investment structure, and always involves the fees imposed by the judicial system. Such fees and expenses are deducted from the principal of the estate;
• The trustee must be prepared to oversee the trust for its duration, which involves a considerable commitment in time, possible emotional attachment, and legal liability;
• A candidate for trustee may be named in the will, but that person has no legal obligation to accept the appointment. If no trustee is named in the will (or is unavailable, even if named), the probate court will appoint a trustee;
• It can be difficult for beneficiaries to bring a dishonest trustee to account. They may sue at law, or the malfeasance may be pointed out at the annual probate court review, but such remedies are slow, time-consuming and expensive, and are not guaranteed to succeed.

Summary

Due to the potential problems, lawyers often advise that a revocable living will or inter vivos trust be created instead of a testamentary trust. However, a testamentary trust may be a better solution if the expected estate is small compared to potential life-insurance settlement amounts.