Testamentary Trusts in New York

Understanding Testamentary Trusts

A testamentary trust is created by the terms of a last will and testament and comes into existence after the person who made the will dies. This distinguishes a testamentary trust from a living trust, sometimes called an inter vivos trust, which is established during the creator’s lifetime. The will establishes the rules that will eventually govern the testamentary trust. Those provisions can identify the trustee and beneficiaries, determine what property will fund the trust, establish when distributions may be made, define the trustee’s discretion, and determine how long the trust will continue. Unlike a living trust, a testamentary trust does not own or manage property while the person making the will is alive. It is part of the estate plan that becomes operative after death. This can allow someone to establish detailed instructions for managing a future inheritance without creating and funding a separate living trust during life.

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How a Testamentary Trust Works

A testamentary trust begins with provisions contained in a person’s will. Instead of directing that property be distributed outright to a beneficiary, the will directs that some or all of the beneficiary’s inheritance be held in trust. After death, the will is generally submitted to the appropriate New York Surrogate’s Court for probate. Once the will has been admitted to probate, an executor can administer the estate under authority granted by the court. After applicable estate expenses, debts, taxes, and other administration requirements have been addressed, property designated for the testamentary trust can be transferred to the trustee. The trustee then manages and distributes that property according to the instructions established in the will. For example, instead of leaving a child an inheritance outright, a parent might direct that the child’s inheritance remain in trust. The trustee could be authorized to use trust property for the child’s education, health, housing, support, and other needs. The trust could eventually distribute the remaining property at a particular age, make distributions in stages, continue for the beneficiary’s lifetime, or use another distribution structure appropriate for the family.

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Common Uses for Testamentary Trusts

Testamentary trusts can be designed for many different family and financial circumstances.

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Planning for Minor Children

One of the most common uses of a testamentary trust is planning for children who may still be minors when a parent dies.

A minor generally cannot simply take control of and independently manage a significant inheritance. Without appropriate planning, additional court involvement or other arrangements may be necessary to manage inherited property for the child.

A testamentary trust allows a parent to establish in advance who will manage the inheritance and how the property may be used. The trustee might be permitted to make distributions for education, medical expenses, housing, activities, support, or other needs while the child is young. The parent can also determine when the child eventually receives control of the remaining inheritance rather than relying on an automatic outright distribution at a young age. The trustee’s role is different from the role of a guardian. A guardian may be responsible for a minor child’s personal care, while a trustee manages property held in the trust. The same individual can sometimes serve in both capacities, but they are separate legal responsibilities.

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Learn more about Guardianship or Special Needs Planning by clicking here.

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Planning for Young Adult Beneficiaries

A beneficiary does not have to be a minor for continuing trust management to be useful. Parents and grandparents may be uncomfortable with a young beneficiary receiving a substantial inheritance outright immediately upon reaching adulthood.

A testamentary trust can provide continued management while allowing the trustee to make appropriate distributions for the beneficiary. The trust might provide distributions at specified ages, permit distributions for particular purposes, give the trustee discretion based on the beneficiary’s circumstances, or combine several approaches. This allows the estate plan to distinguish between providing financial support to a beneficiary and giving the beneficiary unrestricted control over the entire inheritance.

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Managing and Protecting an Inheritance Over Time

Some beneficiaries may benefit from having inherited property remain in trust for a longer period. Reasons might include financial inexperience, spending concerns, creditor risks, family circumstances, disability, or a desire to preserve property for future generations. Instead of distributing the inheritance outright, a testamentary trust can establish rules governing when and why distributions may be made. Depending on how the trust is structured, continuing to hold inherited assets in trust may also provide protections that would not exist if the beneficiary received and personally owned the property.

Those protections are highly dependent on the trust terms and applicable law. A testamentary trust should therefore not automatically be described as providing complete creditor or asset protection.

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Providing for a Surviving Spouse and Children

Testamentary trusts can also be used when someone wants to provide for a surviving spouse while preserving property for children or other beneficiaries afterward. For example, a trust might provide income or other benefits to a surviving spouse during the spouse’s lifetime and direct the remaining property to children after the spouse’s death. This type of planning can be particularly relevant for blended families and second marriages, where someone may want to provide financial security for a spouse while also preserving an inheritance for children from a prior relationship. These arrangements must be coordinated with New York law concerning the rights of surviving spouses and with the remainder of the estate plan.

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Choosing the Trustee and Distribution Terms

The trustee plays a central role in a testamentary trust. Once the trust is funded, the trustee becomes responsible for managing the trust property according to the instructions contained in the will. Depending on the trust, those responsibilities may include managing and investing assets, maintaining financial records, evaluating beneficiary requests, making distributions, handling expenses, addressing tax obligations, communicating with beneficiaries, and eventually distributing the remaining trust property. Choosing a trustee therefore involves more than selecting someone who is trustworthy.

The trustee should also have the judgment, availability, financial ability, and temperament necessary to administer the trust and work with its beneficiaries. The distribution provisions are equally important. A testamentary trust can give the trustee broad discretion, establish particular standards for distributions, require distributions at particular ages or events, or combine these approaches. The objective is generally to provide enough direction to accomplish the creator’s goals without making the trust unnecessarily rigid when future circumstances cannot be predicted.

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Testamentary Trusts and the Broader Estate Plan

A testamentary trust does not operate independently from the rest of the estate plan. Because the trust is established through a will, careful attention must be given to which assets will actually pass under that will. Not every asset necessarily becomes part of the probate estate. Property may instead pass through joint ownership, beneficiary designations, retirement accounts, life insurance, transfer-on-death arrangements, living trusts, or other non-probate transfer mechanisms.

If an asset passes directly to an individual beneficiary outside the will, the testamentary trust provisions contained in the will may not control that asset. This can be especially important when the testamentary trust is intended to hold a significant inheritance for a child or another beneficiary. Beneficiary designations, account ownership, insurance policies, retirement accounts, and other estate-planning documents should therefore be coordinated with the testamentary trust.

The goal is not simply to draft a trust provision in a will. It is to structure the overall estate plan so that the intended property actually reaches the trust.

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Testamentary Trust FAQs

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What Is the Difference Between a Testamentary Trust and a Living Trust?

The primary difference is when the trust is created and begins operating. A testamentary trust is created through a will and arises after the person making the will dies. A living trust is established during the creator’s lifetime and can own and manage property while the creator is alive. Because a living trust exists during life, it may be used for lifetime asset management, incapacity planning, and probate planning in ways that a testamentary trust cannot. A testamentary trust can still provide substantial control over how an inheritance is managed after death without requiring the creator to establish and fund a separate living trust during life.

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Does a Testamentary Trust Avoid Probate?

Generally, no.

A testamentary trust is created through a will, and the will generally must be admitted to probate before the estate can be administered and property can ultimately be transferred to the testamentary trust. This distinguishes it from a properly funded living trust, where property already owned by the trust may remain outside the probate estate. A testamentary trust can provide long-term management and control of an inheritance after probate, but probate avoidance is generally not its primary purpose.

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Learn more about the Probate process by clicking here.

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Is a Testamentary Trust Revocable or Irrevocable?

Before death, the person making the will can generally change the testamentary trust provisions by properly changing the will, assuming the person has the required legal capacity. The testamentary trust itself does not yet exist during that person’s lifetime. After death, the testamentary trust arises under the governing will and generally operates as an irrevocable trust.

That does not necessarily mean that a testamentary trust can never be modified under any circumstances. New York law provides mechanisms that may permit changes to trusts in particular situations, depending on the trust terms, beneficiaries, trustee powers, and applicable legal requirements. Learn more about Revocable or Irrevocable Trusts here.

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How Is a Testamentary Trust Taxed?

After a testamentary trust comes into existence, it may be treated as a separate taxpayer. Depending on the trust’s income and distributions, the trustee may have federal and New York tax-reporting responsibilities. Federal Form 1041 is used for applicable income-tax reporting by estates and trusts. Tax treatment can depend in part on whether income is retained by the trust or distributed to beneficiaries. Trust income-tax rules can differ significantly from the rules applying to individuals. Tax consequences should therefore be considered when determining how a trust will operate, how long assets should remain in trust, and how distributions should be structured.

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Who Should Be the Trustee of a Testamentary Trust?

The appropriate trustee depends on the purpose and expected duration of the trust, the property involved, and the needs of the beneficiaries. A trustee might be a family member, trusted friend, professional fiduciary, financial institution, or another qualified person or entity. The trustee may be responsible for managing an inheritance for many years, making discretionary decisions affecting beneficiaries, maintaining records, overseeing investments, handling tax matters, and communicating with family members. The best trustee is therefore not necessarily the closest relative. The selection should consider judgment, financial ability, availability, impartiality, relationship with the beneficiaries, and the complexity of the responsibilities the trustee will assume.

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Sources & Legal References

New York Estates, Powers and Trusts Law Article 3 — Substantive Law of Wills

https://www.nysenate.gov/legislation/laws/EPT/A3

New York Estates, Powers and Trusts Law § 3-3.7 — Testamentary Disposition to Trustee Under or in Accordance With Terms of Existing Inter Vivos Trust

https://www.nysenate.gov/legislation/laws/EPT/3-3.7

New York Surrogate’s Court Procedure Act Article 14 — Probate Proceedings

https://www.nysenate.gov/legislation/laws/SCP/A14

New York Courts — Probate: When a Person Dies With a Will

https://www.nycourts.gov/help/when-someone-dies/probate-when-person-dies-will

New York Courts — Uniform Rules for the Surrogate’s Court

https://www.nycourts.gov/rules/part-207-uniform-rules-surrogates-court

Internal Revenue Service — Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts

https://www.irs.gov/instructions/i1041