a couple reviewing paperwork on a desk with a calculator and laptop

When planning to leave your assets to loved ones, you have several legal options to choose from. Some individuals opt to include a testamentary trust in their estate plans. But what is a testamentary trust, and how does it differ from other types of trusts? An experienced attorney from Pennington Law, PLLC can talk you through the uses and advantages of testamentary trusts so you can decide whether it’s the right estate planning tool for you.

Our Arizona legal team offers comprehensive estate planning services tailored to every client’s individual needs. Our law firm has been featured in publications such as The New York Times, Forbes, and USA Today, and has received accolades from organizations including Super Lawyers, Best Attorneys of America, and Lawyers of Distinction. Contact us today for a fee consultation with a skilled estate planning lawyer.

How Does a Testamentary Trust Work in Arizona?

In Arizona, a person can create a testamentary trust through their last will and testament.  This type of trust is established within a person’s last will and testament and becomes effective upon the person’s death. Therefore, before creating a testamentary trust, a person must execute a valid, enforceable will under Arizona law. A valid will in Arizona must be in writing and:

  • Signed by the testator (the will-maker) or in the testator’s name by another individual in the testator’s conscious presence and at the testator’s direction
  • Signed by at least two people who sign within a reasonable time after witnessing the testator’s signature or receiving the testator’s acknowledgment of the will

Alternatively, a person can create a valid will by writing a holographic will, which is a will written principally and signed in the testator’s handwriting. A holographic will does not need witnesses.

To create a testamentary trust within a will, a person must appoint a trustee to manage it. The trustee can be an individual, an attorney, or a financial institution. The will-maker must also name the beneficiaries who will receive income and principal from the trust, such as minor children. Finally, the individual must specify the terms of the trust. For example, a testamentary trust for minors may dictate that the child only begin receiving distributions on their 18th birthday or upon reaching a specific milestone.

After the testator’s death, the probate court must approve the will, which allows the personal representative or administrator of the estate to move the deceased’s assets into the testamentary trust as the will directs.

Benefits of a Testamentary Trust

A testamentary trust can be a helpful estate planning tool, offering benefits like:

  • Flexibility in estate planning – There is a difference between a testamentary trust vs. a living trust. Unlike a living trust (also called an inter vivos trust) that you establish during your life, a testamentary trust is only effective upon your death. This setup gives you maximum flexibility to modify your estate planning goals, including changing what assets go into the testamentary trust, naming a new trustee or beneficiary(s), or whether your will includes a testamentary trust at all.
  • Asset protection – A testamentary trust protects assets as your wealth is transferred to the next generation. Because your estate passes to the trust rather than directly to your beneficiaries, you can protect your estate from financial or legal risks your beneficiaries may face, such as lawsuits, divorce, or unwise financial decisions. However, a testamentary trust does not protect against claims that creditors could make against a deceased person’s estate because the assets placed into a testamentary trust must go through the probate process.
  • Managing distributions of inheritances – You can use a testamentary trust to distribute inheritances to your loved ones slowly over time or preserve family wealth by investing your estate and paying income generated from investments to your beneficiaries. A testamentary trust can prove especially helpful if you have younger loved ones whose inheritances you wish to protect.
  • Providing for Loved Ones with special needs – Individuals can also use testamentary trusts to provide financial resources for loved ones with disabilities so they are provided for after you pass away.
  • Tax benefits – People can structure testamentary trusts to take advantage of favorable tax treatments, which can help reduce the loss of the wealth you’ve built to estate taxes or other tax liabilities.

Considerations When Making a Testamentary Trust

Things you should consider when deciding whether to include a testamentary trust in your estate plan include:

  • The possibility you may need to change your estate plan – A testamentary trust may better suit certain estate planning goals than other types of trusts, such as a revocable living trust. Because a testamentary trust only takes effect after your death, you retain full control over your assets during your lifetime and can modify your estate plan as needed. By contrast, assets placed in a revocable living trust are managed by the trust during your lifetime, and while you generally maintain control and can revoke or amend the trust, formally “terminating” the trust is usually required to fully distribute or recover the assets upon your death or incapacity. Additionally, irrevocable trusts typically cannot be terminated or changed except under limited circumstances.
  • The size of your estate – If you do not have significant or complex assets to pass on after your death, you might not need the complexity and cost of a testamentary trust.
  • Whether you have loved ones who need protection – If your beneficiaries are minors, have special needs, or face financial or addiction issues, a testamentary trust lets you control how and when they receive trust funds.
  • Ongoing management of your estate – A testamentary trust will require you to appoint a trustee, who may need assistance from professionals such as attorneys, accountants, or financial advisors, which can increase the costs of distributing your estate to your loved ones.
  • Tax and probate considerations – You should also consider whether a testamentary trust provides tax advantages that align with your estate planning needs. Additionally, because a testamentary trust is established through a will and must go through probate, the estate may incur court fees before the trust can be funded and administered.

How a Testamentary Trust Works for Your Family

A testamentary trust in your estate plan could help your family members by simplifying the probate process. That’s because the executor or administrator of your estate only needs to turn over the assets you’ve identified within your will to the trust. The trustee then manages those assets per your instructions in your will, distributing principal or income to your loved ones as directed by your will or according to the discretion you afford to the trustee.

Talk to an Estate Planning Attorney Today

When undertaking the estate planning process, a knowledgeable Arizona testamentary trust attorney

can identify what legal tools might be suitable for your personal and financial situation. For years, clients have chosen Pennington Law, PLLC for providing clear estate planning guidance to protect their legacies and provide peace of mind as they age. You deserve that, too. Contact Pennington Law, PLLC today for a free consultation.