A testamentary trust is a trust established under the terms of a person’s Last Will and Testament, typically to hold all or a portion of the estate’s remaining residue. Because it is created through a will, a testamentary trust does not come into existence until the testator dies and the will is admitted to probate.
How a Testamentary Trust Is Structured
Aside from how and when it is created, a testamentary trust operates just like a standard living trust and contains the same comprehensive terms, instructions, and protections. The mechanics work as follows.
The will acts as the trust document. Rather than signing a separate, standalone trust agreement, the testator drafts the entire text and rules of the trust directly into the Last Will and Testament. Instead of distributing the remaining estate assets outright to the heirs, the will directs that those assets be held in trust.
The trust terms are fully built out within the will. The testamentary trust provisions are just as comprehensive as those found in a standalone trust agreement. The document will:
- Name the trustees. The will formally nominates the initial trustee and any successor trustees who will take over management of the assets.
- Identify the beneficiaries. It designates the primary beneficiaries, such as a spouse or children, as well as contingent beneficiaries who inherit if the primary beneficiaries do not survive.
- Set distribution rules. It spells out exactly how and when the trustee can distribute funds. This can include mandatory income payouts, discretionary distributions of principal based on an ascertainable standard (for example, a beneficiary’s health, education, maintenance, and support), or staggered outright distributions triggered at certain ages, such as one-third at age 25, half the balance at 30, and the remainder at 35.
- Grant administrative powers. It includes the standard administrative provisions found in any trust: investment powers, authority to manage real estate, and spendthrift clauses that protect trust assets from the beneficiaries’ creditors.
The trust is funded through a “springing” mechanism. The defining feature of a testamentary trust is that it remains completely dormant and holds no assets while the testator is alive. At death, the will must be formally admitted to the Probate Court. The executor first pays the decedent’s final debts, taxes, specific bequests, and administrative expenses. Once those obligations are cleared, the executor distributes the remaining probate assets (“the residue”) to the newly appointed trustee, which officially funds the testamentary trust. From that point, the executor’s role is largely finished, and the trustee takes over, managing the assets for the beneficiaries according to the terms written into the will.
General Disadvantages
While a testamentary trust uses the same mechanical features as a standard revocable living trust, estate planners generally don’t favor it for standard, day-to-day planning, for two main reasons.
Public record. Because the trust is embedded in a will, its terms and the assets it holds become part of the public record once the will is probated.
No lifetime function. Since the trust doesn’t exist until death, it provides no mechanism for managing the testator’s assets if the testator becomes incapacitated during life, and it does nothing to avoid probate. The estate must still pass through the probate process before the trust can be funded.
For these reasons, a living (inter vivos) revocable trust is more commonly used when the primary goals are incapacity planning or probate avoidance.
The Primary Rhode Island Advantage: Spousal Medicaid Planning
Despite these general drawbacks, testamentary trusts serve an important and frequently recommended purpose in Rhode Island: protecting assets for a surviving spouse who may later need long-term nursing home care.
If assets pass to a surviving spouse through a standard living revocable trust, Rhode Island Medicaid rules generally treat those funds as countable resources, which can disqualify the surviving spouse from Medicaid eligibility. If those same assets are instead directed into a Testamentary Spousal Supplemental Needs Trust, created under the deceased spouse’s will, the outcome is different: there is no lookback period or penalty applied to a spousal testamentary supplemental needs trust under Medicaid rules. This structure keeps the assets from being counted toward Medicaid eligibility while still allowing the surviving spouse to access the trust’s principal.
Other Common Uses
Beyond spousal Medicaid planning, testamentary trusts may be used for two other purposes:
Testamentary charitable trusts. Structures such as Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs) can be established at death to generate an estate tax charitable deduction for the decedent’s estate.
Third-party special needs trusts. Family members can use a testamentary special needs trust to leave an inheritance to a person with a disability without disqualifying that person from means-tested government benefits.
Summary
Testamentary trusts are generally disfavored for routine estate planning because they offer no incapacity protection, don’t avoid probate, and result in the trust terms becoming public record. In Rhode Island, however, they remain a useful tool for spousal Medicaid planning, and they continue to serve specific roles in charitable and special needs planning as well.
