Q: My will creates a trust for my children. Can I name the trust in the will beneficiary of my accounts and life insurance?
A: A trust created in a will is known as a testamentary trust, and it is a common element found in many wills. In fact, if you created a will while your children were young, there is a really good chance that you have language in your will that creates a testamentary trust for their benefit.
However, testamentary trusts aren't limited to a minor's trust. Testamentary trusts are versatile and can be used to address many different situations. In a time before everyone and their neighbor decided that they needed a revocable living trust, testamentary trusts were commonly used for tax planning.
One problem I have run into over the years is that although testamentary trusts are fairly common, a lot of folks struggle with what they are and how they work. I have had countless conversations trying to explain how you can have a trust but no trust document. The conversations usually go something like this.
Me: "I represent the Billy Bob trust and I understand that you need additional information to set up the trust's checking account."
Bank: "We just need a copy of the trust agreement."
Me: "It's actually a testamentary trust created in Billy Bob's mother's will. I can provide you a copy of the will and the Court's Order accepting it into probate."
Bank: "We don't need the will, we need the trust document."
Me: "The trust is created in the will, there is no separate trust document."
Bank: "There isn't a trust?"
Me: "No, there is a trust, it's just created under the terms of the Billy Bob's mom's will."
Bank: "OK, well then just get us a copy of the trust agreement."
Me: "Now you're just messing me right?"
This lack of understanding of how a will can create a trust and why you can have trust but no separate trust document, sometimes leads to asset holders reluctance to accept testamentary trusts as beneficiaries, at least without a little prodding. It's this prodding that tends to be the key factor.
It has been my experience life insurance companies understand what and how testamentary trusts work and are usually comfortable naming a trust created in a will beneficiary of a life insurance policy. Banks are less likely to be willing to name the testamentary trust POD beneficiary, especially if the will's creator hasn't passed yet. Remember, until a will's creator passes, the will is just a piece of paper with little to no legally binding effect. It's the death that gives legal effect to the terms of the will and also possibly the acceptance of the will into probate. To create a testamentary trust, the will should at least be spread of record with the court.
What I'm telling you is yes, you should be able to name a testamentary trust beneficiary of your assets. It just may take some convincing and pleading.