Young Parents: Would A Testamentary Trust Be Right For You?

Many parents of young children want to provide for their families, but don’t feel ready to set up a full-blown revocable, or “living,” trust. Luckily, there is another option that might fit their needs. It is a “Testamentary Trust,” or a trust that is part of the parent’s Will (as in “last will and testament”), and only comes into being if the parent dies leaving children under the age set in the Will. This avoids what might be a disastrous situation, if both parents die, leaving all their assets outright to children who are adults but still too young to be able to manage money well. It also covers situations where the children are still legally minors. In that situation, without a Testamentary Trust, a guardian of the children’s “estates,” (i.e. assets) would be appointed and supervised by the Probate Court, which is very costly. New laws in New Hampshire have made Testamentary Trusts a simple and effective way to address the unlikely but tragic event of both parents dying while their children are young.

This is how a Testamentary Trust works:

1. A lawyer drafts a Will with a Testamentary Trust.
2. The Will says that if both parents die before the youngest of their children reaches the age of, say, 30, then the deceased parent’s assets go to a person named as Trustee for the children. The Trustee is then in charge of all the assets of the children.
3. The Trust terms are laid out in the Will, and usually require the Trustee to use the assets in the Trust for the benefit of all the children of the deceased, for their health, education and support, taking into consideration other resources that are available (such as Social Security, life insurance, etc.).
4. If the children are minors, a “Guardian of their persons” (i.e. an adult with legal authority for their care, but not to manage their money) is also named in the Will, and would be appointed by the Probate Court if both parents died. The Trustee pays to the Guardian the funds required for the children’s health, education and support, up until a certain age, such as 25 (to get through college). At that age, the trust “pot” is divided into shares, one share for each child.
5. Starting at age 25, and periodically at ages 27 and 30 (or other ages the parent picks), the child received one third of the principal and accumulated interest of that child’s share of the Trust. This way, the child gets funds gradually and, one hopes, learns to manage them wisely.
6. Changes to NH law have allowed parents to waive the requirements for periodic accounts to the Probate Court by the Trustee, simplifying Testamentary Trusts and making them more cost effective. The lawyer needs to include the “magic language” invoking that change in the law, in the language of the Testamentary Trust: “Pursuant to RSA 564:19, II, I expressly waive the accounting requirements of RSA 564:19, I, and any successor statute thereto, as it may be amended from time to time.”
7. If, as is very likely, the parents do not die before the children reach the ages set in the Will, then the Testamentary Trust never comes into being.

Use of a Testamentary Trust can be effective and economical for parents of young children, wanting to take care of their children’s needs, in the event both parents die. If this might work for you, ask an estate planning attorney about it.