March 24, 2022
John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts, talks with John Maher about testamentary trusts. He explains how they're created by someone's will. Then, he briefly covers the advantages of these trusts and who should use them.
Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is Testamentary Trusts. Welcome, John.
John Brennan: Hi, John.
What Is a Testamentary Trust?
John Maher: John, what is a testamentary trust?
John Brennan: Well, a testamentary trust is a trust created by somebody's last will and testament. I don't know if you've ever heard the term "somebody died testate". That means they died with the will, or intestate, without a will. So, unlike say a revocable living trust, which you create in your lifetime, a trust that's a testamentary trust is created in your will and essentially springs from your probate estate. So, it does not exist prior to death. You do not put assets in it. It is a creature of your will and probate estate.
Does Your Will Specify Which Assets Go into Your Testamentary Trust?
John Maher: Okay. But then your will, will specify what portion or all of your assets that will then go into that trust at the time of your death.
John Brennan: Absolutely. The testamentary trust will be a clause within that, a carve out in the will and will have specific terms. And in fact, it used to be testamentary trusts were really more common, but as there's more litigation and life itself becomes more complex, you see less of them, but there are certainly trusts out there today which have been functioning for a long time, which have sprung from testamentary trusts.
Pros and Cons of a Testamentary Trust
John Maher: Okay. So, what are some of the pros and cons of a testamentary trust and why would you want to use a testamentary trust as opposed to just a, like you said, a revocable living trust?
John Brennan: Yeah. So, the downside is that a testamentary trust can't hold titles postmortem, but the good side is, since it's a part of the probate estate, it's almost like in case of emergency, person's died, there's been an emergency, break glass, and the trust is created via the will. One of the good parts is the probate court then... If you have a testamentary trust, typically there's an accounting you submit to the probate court once a year. So, there's a little bit, there's some court oversight there, meaning somebody's keeping an eye on it. So that can be the good thing.
Another thing is that oftentimes you see testamentary trusts in the context of really, you don't see the most complex, they're usually not dealing with real complex trust matters, but it's usually a timing issue. At age 18 my beneficiary collects this $100,000. At age 25… So that's really the piece that is commonly seen in the testamentary trust where it's timing. And like I said, the upside is you would have somebody watching to make sure that somebody just wouldn't abscond with the funds, say.
Use of a Testamentary Trust
John Maher: Okay, and who is a testamentary trust used for?
John Brennan: Well, like I said, often for these underage beneficiaries, there's also sort of a curious carve out for Medicaid benefits. Eligibility for Medicaid benefits can differ depending on whether somebody has a beneficiary of a trust that's a testamentary trust versus a revocable living trust or a living trust.
So that's kind of a curious distinction and it leads to a couple of Medicaid related strategies, one of which is called the Goldilock strategy. I won't get into that, but that's something that testamentary trusts are used for. Another way you might see a testamentary trust used is again, another use of life insurance. It might be the type of thing that a trust is created at death and receives the proceeds from a life insurance policy. So here you don't need the trust to exist prior while someone's alive, but really only to take the proceeds from the policy and then to have the trust operate them when somebody's passed away.
Summary of Testamentary Trust
John Maher: Okay. So can you just summarize your thoughts on testamentary trust for us?
John Brennan: So testamentary trust is really useful in certain contexts, for certain circumstances where you might want that court oversight might be helpful. I would say a testamentary trust is sometimes used, people didn't think they were going to die at that age because as you get a more robust estate plan, you might just create a trust itself. And then testamentary trusts have that sort of curious, carve out vis-a-vis Medicaid. So there are some times in places where testamentary trusts are useful, but I would say by and large, once you're in the trust business, at this point, it probably makes sense for most people to just create a revocable living trust, probably the preferred way to go. The needs for a testamentary trust is just not as… they're kind of superseded by the strength of a revocable living trust.
John Maher: All right, well, that's good information, John. Thanks again for speaking with me today,
John Brennan: You got it.
Contact Cape Ann Savings to Learn More
John Maher: And for more information, contact Cape Ann Savings Trust and Financial Services at 978-283-7079 or visit the website at capeannsavings.bank.
Investments purchased through the Cape Ann Savings Trust and Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.