Choosing between two things can be almost impossible. Knowing more about your choices can make the decision a little easier. For example, a woman named Clarice B. was finally ready to tackle her estate planning. She had heard of different types of trusts but did not know the difference between a testamentary trust and a living trust. Her attorney was able to shed some light on the subject.
The Basics of Testamentary v. Living Trusts
Every trust consists of at least a settlor, a trustee, trust assets, and at least one beneficiary. Sometimes, the same person may establish the trust as the settlor and serve as the trustee that manages the trust assets. For some trusts, the settlor can even be a beneficiary.
Two general types of trust are testamentary trusts and living trusts.
- Testamentary Trust. A testator creates a testamentary trust through his or her Will. However, Wills do not go into effect until the testator’s death. For example, Clarice B. writes her Will with the assistance of her attorney. She includes language establishing the “B. Family Trust.” Upon Clarice’s death, the personal representative of her estate will create and fund the “B. Family Trust” according to the terms of her Will.
- Living Trust. As the name implies, a living trust is created when the settlor is alive. Once the trust is funded, the beneficiaries may begin receiving benefits immediately or at a later time. This depends on the terms of the trust. As an example, Clarice B. and her attorney decide that she should create and fund a living trust – “The Clarice B. Trust.” She transfers most of her assets to the trust. Upon her death or the termination of the trust, the assets will be distributed to the beneficiaries. She may even choose to use these assets to fund additional trusts.
While the trusts are similar, they have some distinct differences.
A testamentary trust does not avoid probate. Because the trust is funded after the settlor’s death, their Will must be probated before the trust can be created and funded.
On the other hand, the assets in a living trust do pass to the heirs according to the terms of the trust. The assets do not typically pass through probate.
Revocable or Irrevocable Trusts?
Trusts may be revocable, so the settlor can make changes or terminate the trust at will. However, irrevocable trusts are difficult or impossible for the settlor to change. There are advantages to both types of trust. For instance, irrevocable trusts offer asset protection benefits that revocable trusts may not.
Testamentary trusts are irrevocable once the settlor passes away. However, if the settlor changes their Will, they may also change the testamentary trust.
Living Trusts are revocable, because the settlor may change or terminate the trust at any time.
Learn More How Trusts Can Help You and Your Family.
The attorneys at Virtus Law help clients like you develop estate plans that fit their needs. For assistance with your business concerns, call Virtus Law at 612.888.1000 or send us an email at email@example.com. Our main office is in Minneapolis, with other offices located in Maplewood, Cambridge, Edina, Mendota Heights, and Red Wing.