Trusts are popular estate planning tools people use for a variety of reasons including providing for the long-term management of assets for minor beneficiaries, people with disabilities, or financially irresponsible adults. There are different methods of incorporating trusts into your estate plan, each with varying benefits and potential drawbacks.
A testamentary trust is a trust that is created through your will. Although your will includes the framework for how the trust will be managed and administered, the trust does not actually spring into being until your death, and sometimes even until some other contingency has occurred.
For example, a young couple with minor children might create testamentary trusts in their wills to provide for managing the inheritance left to their children until the children reach the age of 25, but only after both parents have died. In this example, the testamentary trust created in their wills may never be funded or used, if one or both of the parents lives past the children’s twenty-fifth birthdays.
Testamentary trusts are relatively inexpensive to create since they are initially just trusts on paper. However, when it’s time to fund and use the trusts, it may be necessary for assets to go through probate court to get to the trust, which can add a layer of complexity and expense.
In contrast, a living trust (also called a revocable trust) is a separate estate planning vehicle created and funded during your lifetime. Living trusts are most commonly used as probate-avoidance vehicles. By retitling assets into the name of the trust or pointing them toward the trust through beneficiary designations, assets can avoid the expense, hassle, and publicity that often come with court proceedings.
Living trusts are also often used for estate tax planning purposes, planning for seamless management during periods of lifetime incapacity, and for the orderly distribution and management of assets at death. As with testamentary trusts, living trusts can also be structured so that a beneficiary’s share will remain in trust until a specified event occurs, such as attaining a certain age.
Establishing this type of trust instrument is more involved, and it takes some work to “fund” the trust. However, the trade-off is that management of the trust should be seamless when you die or become incapacitated.
Talk to an Estate Planning Attorney to Learn More
The right estate planning tools and strategies for one estate may not make sense for another. Meeting with a skilled estate planning attorney can help you better understand various options so you can choose solutions that make the most sense for you based on your specific circumstances, goals, and wishes.