A testamentary trust can give you control over how your loved ones receive their inheritance, especially for minor children, beneficiaries with special needs, or anyone who may benefit from structured support rather than receiving assets all at once. However, it does not avoid probate; it creates ongoing responsibilities and costs for the trustee, and unclear instructions in your will can create problems after you are gone, when you are no longer here to explain or correct them.
Matus Law Group helps families across Ocean County and throughout New Jersey with wills, trusts, probate, and special needs planning. Our team of New Jersey trust attorneys can help ensure your assets protect your children, preserve eligibility for government benefits, and prevent costly family disputes after you are gone.
This guide explains what a testamentary trust is, how it is created under New Jersey law, who benefits most from one, how these trusts are taxed, what they cost to maintain, and the biggest risk to avoid. Call us at (732) 281-0060 to schedule a consultation today.
What Is a Testamentary Trust?
Testamentary trusts are trusts created at death, rather than during lifetime. They are established through your last will and testament, which identifies the trust, explains when it comes into existence, and sets out its governing terms. In many cases, those terms appear directly in the will itself. However, a will may also incorporate a separate written trust by reference, as permitted under N.J.S.A. 3B:3-11.
Like living trusts, testamentary trusts are overseen by a trustee and have specified beneficiaries. The trustee will distribute funds or property according to your specific instructions. This type of trust is often used by parents of minors or children with special needs.
While you are alive, the testamentary trust is only an instruction written into your will. It does not yet exist as a working trust. It holds no money, owns no property, and has no trustee with authority to act. It takes effect only after you die, when your will is submitted to the court and accepted through probate. Only then is the trust created, funded, and managed according to the terms you left behind.
| Factor | Testamentary Trust | Revocable Living Trust |
|---|---|---|
| When it is created | Takes effect only after death, through your will | Created and funded during your lifetime |
| Probate | The will must be probated before the trust can be funded | Assets already titled in the trust can pass outside probate |
| Privacy of terms | Will and trust terms become part of the public probate record | The trust document usually stays private |
| Upfront cost and effort | Lower upfront cost, drafted as part of the will | Higher upfront cost, and assets must be retitled |
| Changes during your life | Change it by updating or replacing your will | Amend the trust at any time while you have capacity |
How Do You Create a Testamentary Trust in New Jersey?
You can create a testamentary trust either by putting the trust terms directly in your will or by having the will incorporate a separate document containing those terms. Either way, the trust depends on the will for its legal effect. That means the will itself must be valid: you must have the testamentary capacity required to make a will in New Jersey, and the will must be properly signed and witnessed. If the will is invalid, the testamentary trust usually falls with it.
Under N.J.S.A. 3B:31-18, a trust may be created by a transfer of property under a will or other disposition taking effect at the settlor’s death, while N.J.S.A. 3B:31-19 details the following requirements of creating a trust: capacity, an intent to create a trust, a definite beneficiary, and duties the trustee must perform.
Who Benefits Most From a Testamentary Trust?
Control over funding is one of the major reasons individuals use a testamentary trust: they want greater certainty over how their loved ones will receive and use their inheritance. Rather than leaving assets outright, a trust allows the funds to be managed and distributed according to your wishes. If you have a child with poor spending habits, the trust can ensure he or she does not squander an inheritance. For a child with special needs, it allows you to provide financial security while someone you trust controls the funds.
A trust also lets you set the timing and the conditions. For example, instead of handing a 19-year-old beneficiary a lump sum, you can direct the trustee to pay for tuition, housing, or medical costs, and release the balance at an age you choose. You can also include a spendthrift provision, recognized under N.J.S.A. 3B:31-36, which can restrict a beneficiary from transferring their interest and may limit what creditors can reach.
Testamentary trusts tend to be the strongest fit for:
- Parents of minor children who do not want assets handed over at age 18
- Families supporting a child or adult with disabilities who may rely on needs-based benefits
- Beneficiaries with spending, gambling, or substance problems
- Parents worried that a beneficiary’s general creditors, civil judgments, or poor spending habits could consume an inheritance
- Anyone expecting a large life insurance payout that would otherwise go to a young beneficiary outright
Key Takeaway: The best candidates for a testamentary trust are families with minor children, beneficiaries with special needs, and beneficiaries who are not ready to manage a lump sum. If everyone in your family is a financially stable adult, the added structure may not be worth it.
How Are Testamentary Trusts Taxed in New Jersey?
Trust taxation in New Jersey depends on the type of trust involved and how it handles income. A simple trust, which is required to distribute its income each year, is treated differently from a complex trust, which may retain income, distribute principal, or accumulate income over time.
For tax purposes, the trust and its beneficiaries are treated as separate taxpayers. Beneficiaries report and pay tax on income distributed to them, while the trust pays tax on income it earns and retains. If income is mandated to be distributed, it is taxed to the beneficiary whether or not the beneficiary actually receives it during that tax year. When income is distributed or required to be distributed, the trust may receive a corresponding distribution deduction, preventing the same income from being taxed twice.
This difference matters because trust income tax brackets are much more compressed than individual tax brackets. A trust can reach the highest tax rate with far less retained income than an individual would. As a result, a trust that accumulates income instead of distributing it may face a significantly higher tax burden than a person earning the same amount of income. That is why income distribution decisions should be made carefully and in coordination with your attorney and accountant.
From an estate planning perspective, a testamentary trust can also be designed to help address federal estate tax planning and New Jersey inheritance tax issues. Whether those benefits apply depends on the value of your estate, who your beneficiaries are, and the exemption amounts and tax rules in effect at the time, since those rules can change.
Key Takeaway: Income retained by the trust is taxed at compressed trust rates, while distributed income is taxed to the beneficiary. Beyond income tax rules, a testamentary trust can also be structured to assist with federal estate tax exemptions and New Jersey Transfer Inheritance Tax considerations.
New Jersey Trust Attorneys, Matus Law Group
Christine Matus, Esq.
Christine Matus was admitted to the New Jersey Bar and the U.S. District Court for the District of New Jersey in 1995, earned her J.D. from Touro University Jacob D. Fuchsberg Law Center, and holds a B.A. in Economics from Douglass College, Rutgers University. She focuses her practice on estate planning, special needs planning, and real estate.
Ms. Matus has lectured on special needs and estate planning, real estate, and nonprofit rules and regulations, and has co-authored articles on elder law topics including the Nursing Home Bill of Rights and OBRA 1993. She is a member of the New Jersey State Bar Association, the Board of Trustees of the Ocean County Bar Association, the Asian Pacific American Lawyers Association, and the American Bar Association, where she serves on its Advisory Panel. She also serves as a mediator with the Superior Court of New Jersey, Special Civil Part, and has held board roles with 21 Plus, MOCEANS, Inc., and the Ocean County YMCA.
Is a Testamentary Trust Simple and Flexible to Set Up?
Developing a testamentary trust is relatively easy. You can incorporate the trust while drafting your will or add it as a separate document that your will can refer to. There are few upfront costs compared with creating and funding a separate living trust, as administration costs are often paid from the trust itself.
The trust can also be tailored to your needs. It is highly flexible and can fit well with the unique needs of those who have minor or special needs children. You can assign different trustees for different children, split the trust into shares, or set staggered distribution ages. You can rewrite the terms as often as you like while you are alive and have capacity, but the moment you pass away, the trust terms lock in place except through court intervention under limited circumstances.
Do Testamentary Trusts Offer Privacy Advantages?
Because a testamentary trust is created within your will, it becomes a public record once it goes through probate in New Jersey. The details of who your beneficiaries are and what assets will go into the trust are not completely private.
On the other hand, there is a key privacy advantage after probate. Once the will is validated and the trust is established, its administration can be private. Your appointed trustee manages and distributes assets according to your instructions without continuous court supervision or public filings.
Unlike a revocable living trust, which remains private from inception, a testamentary trust becomes part of the public court record during probate. However, once probate is complete and assets are transferred, ongoing trust administration is generally private and conducted without routine court filings unless a dispute or accounting is required
What Are the Costs of Maintaining a Testamentary Trust?
Although you will not pay most costs upfront, there are ongoing costs to consider. The trustee may be required to regularly report on trust assets or appear in court for periodic accountings, and legal fees for maintenance may also apply depending on the trust.
A trustee has a duty to keep beneficiaries reasonably informed and to report on trust property and receipts under N.J.S.A. 3B:31-66, and the trust bears its own administration expenses under N.J.S.A. 3B:31-58. Expect ongoing items such as a separate trust tax return each year, trustee compensation, investment or bank fees, and attorney fees when questions arise.
A trust that runs for 15 years while a child grows up means 15 years of paperwork and fees paid from your family’s money. A small inheritance may not justify that, while a substantial one usually does.
What Happens If Your Trustee Refuses to Serve?
In a testamentary trust, the person designated as trustee is not required to serve merely because they were assigned to. N.J.S.A. 3B:31-46 treats trusteeship as a role that must be accepted: a named trustee accepts by taking delivery of trust property or by otherwise indicating acceptance. Until that acceptance occurs, the named person is not bound to act as trustee and may decline the appointment. That can mean the probate court will name someone else, and the trustee could end up being a stranger to your family.
If the position is vacant, N.J.S.A. 3B:31-49 provides the process for selecting a successor trustee, including court appointment when the trust does not name a replacement. While the court will seek to appoint someone appropriate, the court does not know your family dynamics, your child’s needs, or the judgment you would have exercised in choosing that person.
Confirm if your prospective trustee is willing to serve before you sign the will; and name at least one successor trustee. You can also consider choosing a corporate trustee if you have larger or long-running trusts.
Does a Testamentary Trust Avoid Probate in New Jersey?
No, it does not. A testamentary trust is created in your will; therefore, it must go through probate. Your will is a public record, and the court oversees the process of distributing your assets as directed.
Under New Jersey law, your will must be submitted to the County Surrogate’s Court to begin the probate process. This authenticates your will and gives the executor authority to act, and only after probate can the executor transfer your assets into the trust.
If avoiding probate is your main goal, a funded living trust or beneficiary designations are better options rather than a testamentary trust. But if your main goal is controlling how an inheritance is used, the probate step is a reasonable price to pay.
What Is the Biggest Risk of a Testamentary Trust?
A testamentary trust is created according to instructions in a person’s will and only comes into effect after their death. This brings the primary risk: the potential for the trust not to be carried out as the deceased intended.
The risk lies in the clarity and completeness of the instructions left in the will. If those instructions are ambiguous or incomplete, there can be significant challenges in setting up the trust to accurately reflect the wishes of the deceased. Since the trust cannot be reviewed by the person who made the will, errors or omissions may not be caught in time to correct them.
This can lead to disputes among beneficiaries or between beneficiaries and the trustee, causing delays in distribution and could result in legal challenges that could alter the intended effect of the trust. In some cases, a court may reform trust terms to correct a mistake under N.J.S.A. 3B:31-31, requiring litigation, evidence of your actual intent, and money out of your family’s pocket.
The effectiveness of a testamentary trust also depends heavily on the skill and integrity of the executor and the trustee appointed to manage it. If these individuals do not follow closely to the guidelines set out in the will, the trust’s administration may not align with the original intentions.
Key Takeaway: Once you are gone, sloppy trust language in your will usually cannot be fixed without a court fight. Take the time to get the wording right the first time, while you can still say what you meant.
Speak to a New Jersey Trust Attorney
Deciding to include a trust in your will comes down to one essential concern: ensuring your loved ones remain financially secure after you are gone. Evaluating the practical capabilities and limitations of a testamentary trust provides the clarity needed to make the right choice for your family. Get your plan in writing while you still control every word of it.
Matus Law Group focuses on estate planning, special needs planning, and probate for families throughout Ocean County and the surrounding region. Our New Jersey trust attorneys can review your goals, compare a testamentary trust with other options, and draft language that leaves no room for argument later.
Call us at (732) 281-0060 to schedule a consultation. The office is located at 81 E Water St #2C, Toms River, NJ 08753, and the firm serves clients throughout Ocean County and New Jersey.
Frequently Asked Questions: Testamentary Trust Advantages and Disadvantages
When does a testamentary trust take effect?
It takes effect after your death, once your will has been admitted to probate by the County Surrogate and your executor has transferred the designated assets into the trust. Until then, the trust holds nothing and the trustee has no authority to manage or distribute assets.
Can I change a testamentary trust after my will is signed?
Yes, while you are alive and have capacity, you can amend or replace your will to change the terms. After your death, the terms are now fixed. Only the court can modify them, and only in limited circumstances.
Do I still need a will if I want a testamentary trust?
Yes. The will is the document that creates the testamentary trust. There is no testamentary trust without a valid will.
Who pays the trustee and the trust’s expenses?
Trustee compensation, tax preparation, and legal fees are typically paid from trust assets. That is why the size of the inheritance should be weighed against the cost of running a trust for years.
Can a testamentary trust be used for a child with special needs?
Often, yes. Parents frequently use a trust created in the will to hold assets for a child with disabilities so the funds can supplement needs-based benefits. The drafting must be precise, so this is worth reviewing with an attorney.
Does a testamentary trust protect a beneficiary from creditors?
A spendthrift provision restricts a beneficiary from transferring their interest and protects trust assets from most general creditors. However, New Jersey law creates statutory exceptions for claims such as child support, alimony, and certain government obligations.
Is a testamentary trust better than a living trust?
A testamentary trust is cheaper and easier to create but goes through probate, while a funded living trust costs more upfront and can help assets pass outside probate. It depends on your goal.
