Testamentary Trust

What Does Testamentary Trust Mean?

A testamentary trust is a trust that is created upon a testator’s death, designating a specific amount or property to be held by a trustee for the benefit of a beneficiary. A trust, in general, is an arrangement where one person holds the title to property and manages it for the benefit of another.

Many testamentary trusts are funded with the proceeds of a life insurance policy, since the payout becomes available around the same time the will takes effect.

Insuranceopedia Explains Testamentary Trust

An example of a testamentary trust is when a parent creates a trust in their will to leave a certain sum of money deposited in a bank for the educational benefit of their youngest son. In this trust, the parent may specify that funds will be released when the son turns 16, with periodic disbursements each year until he completes his college education. The remaining balance would be given to him when he reaches the age of 25.

When a life insurance policy is set up to pay into the trust, the trust itself is named as the recipient rather than the child. Getting that paperwork right is one of the most common life insurance beneficiary rules people overlook, and an error can cause the money to skip the trust entirely.