A testamentary trust only comes into effect when the grantor of the trust dies whereas the living trust can be created during the grantor’s lifetime. They’re both suitable to transfer assets, but there are key differences. 

Knowing the details about trusts is critical for your estate plan. Trusts are valuable instruments used to leave assets to people as you would want after you have passed away. But let’s get more into how the testamentary trust and living trust vary. This article explores the differences, the pros and cons, and the legal aspects of each type.

Understanding Trusts -The Basics

But first, let’s establish what a trust actually does. Because it’s not the only financial tool that you can use to handle your assets once you’ve passed away. It just happens to be a very good choice, given what a trust can do. 

What is a Trust?

Trusts are a legal deposit of assets held by a third party (the trustee) on behalf of beneficiaries. In the process, you create a trust and that makes you the grantor. Trusts can be built for different reasons in life, whether it is to protect assets, for estate planning, or to make sure loved ones are taken care of.

Trusts can be broadly classified into two types - Revocable and Irrevocable. You could create a revocable trust where you can change it or eliminate it during your lifetime. On the flip side, an irrevocable trust is one that cannot be changed once you’ve established it. 

Different pros and cons come with each style of trust. A revocable trust, for example, allows flexibility and control — a benefit for those who wish to tweak their estate plans as life progresses. 

On the other hand, while a revocable trust offers no tax advantages and limited protection, irrevocable trusts can provide substantial savings on taxes as well as superior asset protection because the assets within them are generally considered out of the grantor's estate.

Why Trusts are so Important in Estate Planning

Building trust can be a valuable tool for estate planning. They offer a way to move assets, cut back property taxes and forestall fights over your estate in probate court. A properly established trust can keep children out of probate court, speed the transfer of assets, and clearly lay out how the creator wants to see their legacy handled.

Most trusts also bring a level of privacy. They do not usually become part of the public record, as would anything that passes through probate. For those who want to keep their estate matters private, this is critical. 

In addition, trusts can be individually configured to address a number of needs, from support for children under 18 to care for the disabled without affecting Medicaid eligibility. 

Having a trust in place allows the grantor to control how and when assets will be distributed You can make sure your beneficiaries receive the help they need in the way that you want. Such control is particularly valuable in complex family circumstances or when large assets are involved.

Understand Testamentary Trusts

There are a lot of questions about testamentary trusts. For example, is a testamentary trust revocable or irrevocable? The testamentary trust is always irrevocable because it only comes into effect after the grantor’s death. But let’s take a thorough look at how these trusts work to plan your estate. 

Defining Testamentary Trusts

A testamentary trust is created through a will and becomes active after the death of the grantor. A trust of this kind is usually created under specific language in the grantor's will. You set forth how and when funds are to be distributed among the beneficiaries.

Testamentary trusts are often created to hold assets for minors or disabled beneficiaries.  They provide a method by which assets can be gradually administered and distributed. 

You can add conditions for when your beneficiaries will receive their inheritance (e.g., upon reaching a certain age). This helps to make certain that your wishes are maintained, especially when minor beneficiaries have not yet developed the maturity or financial skill to manage substantial assets.

Benefits of Testamentary Trusts

So why choose a testamentary trust? There are a lot of positives when it comes to this trust. 

• Control and Flexibility:
  The grantor preserves the power of asset distribution with options that respect their desires.
  
  
• Protection for Minors:
  By using testamentary trusts, it ensures that your assets are protected until a child achieves an age of maturity and responsibility.
  
  
• Tax Benefits:
  This trust can offer tax benefits, depending on the structure and state law.

Disadvantages of Using Testamentary Trusts

The testamentary trust can bring some benefits, but it also has some downsides you should know about. 

For one a testamentary trust is subject to probate. This means that after you die, everything in your will and trust has to pass through a lengthy process before anyone can get what you’re giving them. 

Second, if your beneficiary has financial difficulties, a testamentary trust will likely not provide protection against creditors. That could be difficult if a lawsuit threatens your assets. 

If the grantor later has a change in circumstances, then making any changes to the trust also means revisions to the will. This can be cumbersome. Of course, you want to have periodic reviews and possible changes, but if you’re not familiar with estate planning intricacies, this can be a hassle. 

In addition, the administration of a testamentary trust can include ongoing legal and accounting burdens due to the need to appoint a trustee who will have jurisdiction over the assets of the trust. These often come with extra costs that could reduce the total value of the estate that can be passed on to beneficiaries. 

Unveiling Living Trusts

On the other side, we have a living trust. The living trust can be a revocable trust (vs. the testamentary trust which is irrevocable), which could offer you some attractive options.  

Understanding Living Trusts

A living trust, or inter vivos trust, is created while the grantor is still alive. This trust can be revoked or modified at any time, so it offers a great deal of flexibility and control over the assets held in it. One of the advantages of a living trust is its flexibility, which helps appeal to those who like to keep their hand on the wheel when it comes to estate planning.

A living trust can also be either revocable or irrevocable. If it’s revocable, that allows you to maintain control over the assets while you are alive. It is the kind of trust you hear about in estate planning as a way to circumvent probate and ensure that assets can easily be moved from one place to another. 

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Additionally, living trusts may also be an interest to parents with minor children given that they can designate a trustee to manage assets on behalf of the children until they reach adulthood. You can use the living trust to prevent problems and ensure their financial needs are met during this important period.

Advantages of Living Trusts

• Avoiding Probate:
  A living trust passes the grantor's assets to beneficiaries directly, rather than requiring them to go through probate.
  
  
• Flexibility:
  During the lifetime of the grantor, it is modifiable or revocable.
  
  
• Privacy:
  Living trusts avoid probate and are therefore kept out of public record.

The Cons Of A Living Trust

Benefiting from a living trust comes at the price of some downsides. 

The upfront setup costs may be more than what’s needed if you want to establish a will only, especially if it calls for significant legal assistance. 

You must transfer all assets into the trust in order for them to skip probate. This process of transferring assets, or "funding the trust," is a meticulous routine for making certain that nothing is overlooked. 

In certain states, living trusts don’t offer creditor protection as the grantor remains in control of everything while they’re alive. This means that if the grantor experiences financial distress, those creditors can still reach into the trust and take out assets. This could undo the protective feature you need for your estate planning.

Living Trusts vs. Testamentary Trusts - A Breakdown

Still confused? Don’t be. Let’s lay out both options side by side to see which trust would serve you best. 

Choosing a Testamentary Trust 

A testamentary trust could be suitable if you want assurance about how your desires are being carried out after you die. You might have specific requests about handling your assets. It is especially useful for people with young children or beneficiaries who would benefit from help in managing their inheritance.

If you’re just looking for a simple option, a testamentary trust created through an excellent will is likely enough for you. The good news is that not all jurisdictions take a long time to probate and administer an estate. 

You can still create those provisions for beneficiaries who might not yet be financially mature enough to handle your assets. They might still need a few years to learn how to manage what they have received through a trust. 

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Choosing a Living Trust

Living trusts are attractive to people who want nothing at all to do with probate. However, individuals with substantial assets or complex estate planning needs may ultimately prefer a living trust. If you have a high net worth, you’d want to create a living irrevocable trust, which offers excellent asset protection. 

Moreover, if privacy is crucial and you do not desire to have your estate details exposed, a living trust will be the best decision for you. Nobody needs to know the names of your beneficiaries or how many assets you have. 

Because a living trust can be revocable, it’s well-suited for someone who needs control of their assets while they are alive. With life changes such as getting married, divorced or having a baby, you can make amendments or completely cancel the trust with your assets still intact. 

In addition, a living trust established with an experienced estate planning attorney will make powers of attorney unnecessary and provide a roadmap to avoid court delays and expenses to establish conservatorship.

Legal Implications of Trusts

How does the law look at these trusts? It depends from state to state, of course, but most jurisdictions have pretty similar views on living trusts and testamentary trusts. 

Testamentary Trusts and Probate

Perhaps the most important legal feature of testamentary trusts is that they are subject to probate. Probate is a legal process that authenticates the deceased's will and settles the estate debts and property as directed by the will.

This could incur significant costs from associated legal fees that would reduce the estate’s value available to your beneficiaries. 

Additionally, probate processes can be slow in distributing your assets to beneficiaries. This process can drag on for several months or even years in some cases, especially if there are disputes among beneficiaries or the will is contested. 

Living Trusts and Probate Avoiding

Unlike wills, living trusts distribute your assets immediately after you die without a court intervening in the process. Your assets change hands a lot faster, which could be important at a very difficult time. 

This is not only a time-saving pathway but also can save quite a lot of money. Living trusts can also ensure that you are cared for in case you become incapacitated. Your financial affairs are managed according to your desires even before you die.

Living trusts bring clarity to beneficiaries by specifying the terms and conditions for asset distribution, thereby reducing the chances of controversies. 

However, grantors need to make sure that all appropriate assets are transferred to the trust if they want to take full advantage of this boon. If you do not transfer the assets into the trust, they may be subject to probate and defeat many of the purposes of establishing a living trust. 

Your trust should also be reviewed and updated on a regular basis, especially after significant life events such as marriage, divorce or the birth of children.

Testamentary vs Living Trusts: What’s Best For You?

Understanding the differences between a testamentary trust and a living trust, therefore, is crucial to your estate plan. Determine the goals for your asset management and distribution so that you can analyze what specific trust type will be appropriate.

But it’s not an easy choice. That’s why we can help. If you fill out the form below, we’ll be in touch shortly to talk through your estate plans, your goals, and help you decide which trust is best. 

Why wait? Fill out this form right now and we can get started on a financial plan that secures your future. 

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