A testamentary trust is a trust created by a will. As such, the trust does not go into effect until the grandparent dies. In her will, the grandparent must include language expressly creating the trust. She must identify the assets to be placed in the trust and describe what they are to be used for and when; identify her grandchild as the beneficiary (the person who benefits from the trust); and designate a trustee (the person who manages the trust on behalf of the grandchild).
As the creator of the testamentary trust, a grandparent can change the terms of the trust at any time before her death. However, once she dies, the trust becomes irrevocable and cannot be changed. Instead, it goes through probate -- the legal process of administering a decedent's estate -- where the probate court monitors its administration until the trust has accomplished its purpose. Since the terms of the trust will be carried out after death, the choice of trustee is especially important: This person will be entrusted with carrying out the grandparent's wishes as outlined in the trust.
Once a grandparent decides to establish a testamentary trust for her grandchild's college education, she must next consider how she wants the funds to be used to achieve that goal. The terms of the trust can be as flexible or as restrictive as she chooses. For example, she may want to limit funds to the payment of tuition, books and boarding only. Or distribute a lump sum payment upon the grandchild's graduation from high school and enrollment in college. Another alternative is to make a certain amount available at the beginning of each term and leave it up to the grandchild to decide where and how to spend it. Grandparents should also consider whether they want to limit funds to a particular type of institution, such as a private, public or vocational school.
It's helpful to include a clause in the testamentary trust that explicitly addresses what happens if a grandchild decides she doesn't want to go to college. For example, the grandparent could instruct that funds would be distributed to the grandchild on her 30th birthday instead, or treat the failure to attend college as a forfeiture of the funds and distribute them to another family member.