The most common usage of testamentary trust are:
Example 1: To hold the residential property of the testator so that dependents can stay in the house until they are financial independent or dies. This is to prevent the property from being sold prematurely. The property can be sold and proceed given to stated beneficiaries when the trust ends.
Example 2: Instead of giving a lump sum to beneficiaries, a testamentary trust can be used to give them a monthly allowance over a period of time. This is a popular method because beneficiaries may be too immature or gullible to receive a lump sum benefit. Giving them a lump sum introduces the risk of being a target of scams, get-quick-rich schemes and unethical financial salespersons. If the testator so desires, he can also insist that the trustee appoint an investment adviser to advice how the assets should be managed so as to help grow the assets more effectively.
Example 3: A testamentary trust can be used to control how monies are distributed based on certain preset conditions. For example, the testator can specify that a certain lump sum of say $100,000 to the child’s education if they managed to go to a recognized university (not just any university). Another way is to give a monthly allowance based on say 20% of the children’s own monthly income. In this way, the trust motivates and creates an incentive for them to work hard.
Example 4: With the introduction of casinos at the country’s door step, there is a danger of beneficiaries squandering their inheritance at the gambling den. A testamentary trust can be setup to provide maintenance and allowance for the beneficiaries based on a discretionary basis. Unlike a fixed monthly allowance, the trustee has to exercise discretion.
An individual trustee can manage a testamentary trust. However, the time and effect to maintain such a trust over a long period of time usually make it impractical for individuals to do it. Therefore, a testamentary trust is only practical if a corporate trustee is appointed as the trustee especially if the testamentary trust last for an extended period. In Singapore, a trust is permitted to be setup for 100 years. However, there are ways to “get-around” this limitation and thus extending the live of a trust perpetually.
Like this article? Subscribe to my newsletter below for more.