Managing a Testamentary Trust

By Anna Assad

A person may use her will to create a trust -- known as a "testamentary trust" -- for her beneficiaries. This type of trust begins once the creator -- or "settlor" -- dies and estate settlement proceedings end. The trustee named in the will is responsible for managing the trust and follows its terms until the trust ends.

Terms

A settlor may include any trust terms she wants as long as she isn't breaking any laws. She might set rules to give her beneficiary money at specific ages but allow for emergencies. For example, Anna is creating a trust for her minor nephew, Kyle, in her will. She doesn't want Kyle to receive trust money until he's 21 unless he experiences a financial or medical emergency. Anna can create trust rules that specify this; she can also define what qualifies as an emergency in the trust's terms. If Mark is named as the trustee, he can't give Kyle money until he's 21 or has an emergency. Depending on what Anna's written, however, Mark might be responsible for deciding whether Kyle's circumstances qualify, under Anna's terms, for a distribution.

Responsibilities

A testamentary trustee manages all the trust's assets and income. He pays any expenses associated with the assets out of the trust money and puts any income the assets make back into the trust. For example, Adam is managing a trust that owns a rental home. Adam pays the expenses related to the rental home, such as property tax bills, out of the trust's bank account and deposits the rent he receives into the bank account. A trustee gives beneficiaries distributions in the amounts set by the trust terms, following the settlor's payment schedule and rules. A trustee protects assets--such as arranging for repairs to real estate--and both makes and manages the trust's investments -- if he's allowed to invest under the trust's rules. The trustee also has to prepare and file the trust's federal and state tax returns.

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Considerations

The trustee has a legal duty to act in good faith regarding the trust. If he doesn't meet this obligation because he's negligent or intentionally acting in bad faith -- such as using trust money to pay his personal bills -- he's liable to the testamentary trust beneficiaries for any losses. They may sue him in court. A probate court doesn't always supervise a testamentary trust, but it does give the trustee authority. To get this authority from the court, a testamentary trustee may have to post a bond with the court to protect against loss to the trust because of his actions. Whether a court oversees a trustee's activities after his appointment depends on various factors, including the settlor's terms and state laws.

End of Authority

A testamentary trustee's obligations and authority end when the trust does. A testamentary trust usually ends by its own terms. For example, if Anna's trust's terms state that the trust ends when Kyle turns 25, the trust ends at that time. The trustee is then responsible for giving Kyle all the remaining trust assets. A court may remove a testamentary trustee if he's not meeting his legal obligations, or if he dies or resigns. If the settlor named a successor trustee in his will, that person may apply in probate court to become trustee. A trust beneficiary may nominate a new trustee if the will didn't name a successor or the successor can't act.

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What Is the Power of a Trustee in a Testamentary Trust?
 

References

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