Differences Between Testamentary Trusts and Living Trusts

At Radiant Probate & Estate Law, Inc., we help clients explore various estate planning options. If you’re in the midst of planning for your future, you may consider establishing a testamentary trust vs. a living trust. What are the benefits of these trusts, and how can you decide which one is right for you?

Learn about their key differences below.

Understanding the Role of a Trust

Few people understand the difference between a will and a trust. While they are both important aspects of estate planning, trusts tend to be more complex, with many different types available. A trust allows you to manage your assets and assign beneficiaries who will receive them upon your death.

You will also appoint a trustee to oversee the trust and distribute assets to the proper beneficiaries. One of the biggest advantages of establishing a trust is forgoing the probate process. Assets listed in a will typically have to go through this time-consuming process before an estate is settled, whereas assets in a revocable living trust avoid probate.

How Testamentary Trusts Work and the Benefits They Offer

A testamentary trust, also known as a will-based trust, is created as part of your will. Like a standard will, it only goes into effect upon your death. A main reason why people opt for a testamentary trust vs. a living trust is that they can set parameters for younger heirs.

Say you add your child as one of the beneficiaries of your estate once they are born. If you suddenly pass while they’re still a minor, what does that mean for their inheritance? With a testamentary trust, they will remain a beneficiary but only receive assets according to your wishes.

Rather than letting your child inherit assets once they turn 18, you could stipulate in the trust that they shall receive monthly benefits beginning at 18, and then inherit the rest at age 21.

It becomes an irrevocable trust at the time of your death, so the terms you set cannot be changed.

Understanding Living Trusts and Their Advantages

If you want to establish a revocable trust, legal professionals often recommend a living trust. By doing so, you’ll be able to add and remove assets at any point during your lifetime. If you should become incapacitated, a trustee of your choosing will step in to manage the trust.

This individual is also responsible for distributing assets to beneficiaries upon your death. Some of the main advantages of a revocable living trust are:

• Probate avoidance: Your loved ones can avoid the lengthy probate process and settle your estate faster than with a testamentary trust.
• Greater privacy: By avoiding probate, your estate won’t go on public record.
• Control of assets: If you acquire new property, such as a brand-new car or vacation home, you can easily add these assets to your trust.

Testamentary Trust vs. Living Trust: Which Is Right for You?

While each of these estate planning solutions has its advantages, you might find one choice more suitable for you. How can you make an informed decision?

Ask yourself the following questions before starting the process:

• If I die today, will my heirs be too young to manage the assets they’ll receive?
• Do I want my estate to go through probate?
• Are there any notable assets I’ll want to add or remove from my trust in the future?
• Do I want my estate plan to take effect now, or only when I die?

By reviewing the answers to these questions, you’ll have a better understanding of which trust is best suited for your situation. Bear in mind that upon your passing, neither option prevents creditors from seeking payment of any outstanding debts. Your loved ones may have to use the funds within your estate to compensate creditors before it is settled.

You’ll also have to consider estate taxes when planning for your future. Depending on your state’s tax requirements, establishing an irrevocable trust may be a smart move. A qualified attorney could explain your options and aid with estate tax planning.

To learn more about how these trusts work and their benefits, see what is a living trust for a detailed explanation.

Consult an Estate Planning Lawyer About Your Needs

After learning about how trust administration works, you can make an informed decision about opening a testamentary trust vs. a living trust, choosing a trustee, and more. Navigate this complex process with Radiant Probate & Estate Law, Inc. Our legal team has years of experience practicing estate law and will guide you through these sensitive matters.

To schedule a consultation, contact our firm at (650) 549-9620.