When setting up an estate plan, it is often beneficial to set up a trust. But do you know which trust—living or testamentary—to execute?
The two main types of trusts are living trusts and testamentary trusts. A living trust is in effect during the testator’s life, but a testamentary trust only goes into effect after the testator’s death.
A testamentary trust is established in an individual’s last will and testament, which includes a provision that directs the executor of the estate to set up the trust after the testator’s death. Even though the will is created while the person is alive, only in death will the trust be established. The will has to be authenticated through probate before the executor can transfer assets into a trust. Generally, a testamentary trust is used when someone wants to leave assets to a beneficiary, but not until a specific time.
Once the testamentary trust is set up, an appointed trustee will manage those assets until the trust or its assets are passed onto the intended beneficiary. There is usually a timeline, such as the beneficiary reaching a certain age.
While a living trust is revocable after it’s created (while the testator is still alive), a testamentary trust is irrevocable, since it’s created after the death of the testator. However, a living trust can distribute into a testamentary trust, which eliminates the need for probate.
Why create a testamentary trust?
1. Flexibility: it allows you to control asset distribution—or turn over control of the trust itself—to certain beneficiaries at certain time periods.
2. Protection against third parties: the trustee holds the title to the assets—not the beneficiary. That means the trust is protected against bankruptcies, court proceedings, creditors, predators, or their own bad judgement.
3. Tax Planning: distributions to minors receive full tax-free concessions.
While a testamentary trust may be great for estate planning and beneficial if you have children under 18, you must go through the probate process regardless. Since it all depends on your particular circumstance, it’s always best to speak with a qualified estate planning attorney to help you decide the best course of action.
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