a. What is a testamentary trust?
b. Why do people create a testamentary trust in their wills?
c. Do I really need to create a testamentary trust in my own will?
Hence, in this article, I’ll explain what a testamentary trust is and three reasons to set up a testamentary trust so that you could decide if having one is for you.
A Testamentary Trust Is …
likened to one preparing an empty box.
Inside this empty box, it contains a list of instruction guides.
Upon his passing, his trustee shall retrieve the empty box.
Following the instructions given, the trustee shall collect the assets stated, keep them, manage them, and distribute them to one’s intended beneficiaries in due time. So, the next question is:
How is This Different from Bequeathing Estates Directly via a Will?
Here is the difference:
If a person has a will without setting up a testamentary trust, the estates will be collected by the appointed executor and shall be distributed to his beneficiaries directly after settlement of outstanding debt or taxes.
Whereas, if a person has a testamentary trust in his will, the estates listed in his testamentary trust will first be collected by the executor and handed over to his trustee for safekeeping and management. The trustee shall distribute his assets to his beneficiaries at a time preset by the person in accordance with the trust.
Commonly, a person would set up a testamentary trust in his will due to:
#1: They Want to Bless Their Children
without spoiling them with money.
Let’s say a father has RM 1 million and he has a 15-year old son. He wrote his will, but opted not to create a testamentary trust within his will. In his will, he wishes to bequeath all of his cash to his beloved son. Sadly, he passes on shortly after when his son reaches 18 years old.
Will his son inherit the money in full? Yes.
Will the money be a blessing to him? Hmm… We can’t be so sure about it.
This is because it really depends on his son’s financial intelligence or maturity in dealing with money when he receives it. His son could be a financial genius and he could grow the RM 1 million received into a bigger fortune, via businesses or through sound investments. Alternatively, he could squander off his inheritance through lavish spendings.
So, instead of taking a chance, a wise parent would set up testamentary trust in his or her will document, where the parent can choose to distribute the money, either in installments or in stages upon fulfilling certain criterias. For instance,
a. The son can receive a part of the RM 1 million after finishing university.
b. The son can receive a handout of RM 2,000 a month starting at age 25.
c. The son could receive the full RM 1 million once he reaches 30 years old.
and so on and so forth.
Hence, a testamentary trust is set up to prevent beneficiaries from squandering their inheritance, turning a blessing into a curse.
#2: They Want to Care For Special Needs Dependents
This may include special needs children, old folks who require medical care and other dependents who are physically and / or mentally incapable.
You know that they could not fend for themselves despite you leaving them RM 1 million or more in cash and / or properties via a will. This is because, for some of them, they could not perform normal financial transactions.
In this case, it will be practical to appoint a trustee to collect your estates which you want to bequeath on behalf of your special needs dependents. From there, the trustee could administer the estates and work closely with the dependents’ caretakers to care for them over the long-term.
#3: They Wish to Bequeath Their Houses to Their Loved Ones.
Here is a scenario.
Let’s say we have Uncle Chan, who is 55 years old this year.
Uncle Chan lives in a RM 2 million bungalow in Ipoh with his wife. Jin, their son, is 15 this year and he is studying in a sports school in Kuala Lumpur.
Uncle Chan intends to bequeath his bungalow to Jin. But, he wants the transfer of the bungalow’s title deed only after his wife’s passing (so that his wife will be secured a permanent place of residence) and when Jin reaches 30 years old.
Hence, Uncle Chan could set up a testamentary trust in his will where, upon his passing and if his wife and Jin are still alive,
a. His trustee shall collect the bungalow’s title deed for safekeeping.
b. The bungalow could not be sold or marketed to a new prospective buyer.
c. His wife could live in the bungalow for as long as she lives as its living tenant.
d. Jin shall inherit the bungalow once he hits 30 and upon his mother’s passing.
So, in this way, Uncle Chan’s testamentary trust could protect the interest of his wife and his son. This will prevent his son from inheriting the bungalow and sell it off for quick money at the expense of his mother’s interests.
Do You Need a Testamentary Trust in Your Will?
This depends on whether or not, you have:
a. An intention to delay the estate bequeathment to your beneficiaries.
b. Have special needs dependents that require constant care.
c. Have multiple assets which require specific instructions to administer them.
Otherwise, a simple will, that is without a testamentary trust shall be sufficient.
Each of our situations are different and thus, needing custom-made planning in regards to the administration of our estates. To begin you can fill in your details below and book yourself a light 30-minute consultation session with a qualified estate planner to brainstorm for ideas on how you could plan yours efficiently.