Testamentary Trust vs Living Trust: What’s the Difference?
Will a testamentary trust or a living trust be best for your situation? If you find yourself wondering the answer to this question, then hiring an attorney should be your next step to protect your family and protect your assets.
Read for further details.
Introduction
Planning for your future means sometimes having to think outside the box. You could keep all of your money in the bank and your assets as they are, but what happens when you die? Will your estate be stuck in probate for months and months? Will your bank accounts be frozen until all your creditors are paid? Will your grieving family suffer even more?
End-of-life protection is just one of the reasons to put your assets in a trust. Truth is, there are so many to choose from – and you cannot take advantage of all they have to offer if you don’t know what they are, right?
Today, we are going to look at two trusts that seem to try to accomplish the same goal. Yet, they are different. The testamentary trust and the living trust.
What is a Trust?
A trust is technically an entity that is created to take ownership of your assets. There is an agreement between the owner of the assets (the trustor) who gives them to the trust to be managed by the trustee, based on the direction of the trustor. And it is all done for the benefit of the beneficiary.
Putting your assets in a trust will help you to control certain aspects of your wealth, protect your legacy from creditors, and give you privacy by keeping your estate out of probate when you die.
There are different types of trusts to choose from depending on your assets, your beneficiaries, your desired level of control, and so on.
Revocable or Irrevocable?
Two major types of trusts are revocable and irrevocable. And, as their name suggests, they are exact opposites of one another. Let’s break them down.
A revocable trust is, in a sense, known as a living trust. It is set up to withhold your assets throughout life, allowing you to make changes like add or remove assets, change beneficiaries, and otherwise allow for the changing circumstances that come with living. With a revocable trust, you may still be the owner of the assets that are held in trust.
An irrevocable trust transfers your assets into a trust by moving them from your estate and into control of the trust. While it will protect you in probate and maybe even save you money on estate taxes, there is one catch – once you set up an irrevocable trust, you cannot make changes.
This type of trust takes ownership of the assets. You lose control and can no longer make changes to the trust, dissolve the trust, or even change the beneficiaries. It is designed for those seeking protection after death.
Testamentary Trust
The term testamentary means bequeathed by a will or testament. Therefore, a testamentary trust is provided for in a will. It is not a trust that is set up now, but one that would be set up upon death.
In other words, when you die, your will would instruct the executor to put the trust in place. Only at this time would the trust become active. A trustee may be appointed or the executor of the will could take on this role. A testamentary trust will not keep your estate out of probate since the trust is not set up yet. It will be created at the end of the probate process – which could take some time.
Testamentary trusts are most commonly used by those with minor children. If an individual didn’t want to leave her entire estate to her six-year-old daughter, she could state in the will that the beneficiary could receive the assets in a trust. This could then be there for her when she turns a certain age or in specified payments through her lifetime and so forth.
Because this trust is not set up prior to death, a testamentary trust is considered an irrevocable trust.
Living Trust
Living trusts are set up when you are alive, as the name suggests. It would be set up with assets transferred into the trust and beneficiaries listed. There would also be terms of the trust drawn up as well. If this pertains to minor children as beneficiaries, these terms will spell out all the details anyone needs to know – including after death future incremental payments to minor children.
In preparation for your death, the living trust would be in place and there would be no need to worry about the estate going through probate or whether or not your beneficiaries will be provided for in the future.
Living trusts are revocable trusts throughout your life. Therefore, you can make changes with your assets, beneficiaries, and such until the time of your death. Then, your living trust becomes irrevocable.
Let’s Recap the Differences
Both the living trust and testamentary trust protect your assets after you die to make sure they go directly to the person or persons you designate. They both allow you to designate specific beneficiaries and provide for future payments to minor children.
Below are the differences worthy of note.
A testamentary trust:
- Is irrevocable.
- Is not created until you die.
- Will not keep your estate out of probate.
A living trust:
- Is revocable.
- Is created now – while you are living.
- Keeps your estate out of probate – and may avoid estate taxes.
How an Attorney Can Help
Preparing your estate for your family and your future can feel like a complicated and overwhelming process. And taking the wrong step could potentially lead to issues after your death.
To ensure that everything is taken care of properly – and that all bases are covered – you will want the expertise and careful eye of an attorney. This means you will have a professional to handle all of your estate planning so that there are no surprises when it is too late.
Are you in search for a certified attorney to represent you?
Let us help you find one today!