Which trust type is right for you?
Both a living trust and a testamentary trust can perform many of the same functions. The key difference between the two is the timing and mechanism of their creation. A living trust is created during the grantor’s lifetime, and can be used immediately to hold and manage assets on behalf of designated beneficiaries. A testamentary trust is created by action of a last will and testament, and only comes into existence after the death of the decedent.
Your Estate Planning Toolbox
When planning your estate, it’s important to know the tools available to protect your assets and make sure your wishes are followed. Two common tools are living trusts and testamentary trusts. While they can do many of the same things, the main difference is when and how they are created.
Living Trusts
A living trust is set up while you’re still alive. With this trust, you can transfer your assets into the trust and still keep control over them as the trustee. The trust can be used immediately to hold and manage these assets for the benefit of the people or organizations you choose, known as beneficiaries.
One significant advantage of a living trust is that it can help your family avoid probate. Probate is a legal process that can take a long time, cost money, and become public. Because the trust owns the assets, they pass directly to your beneficiaries according to the terms of the trust, without going through probate. This makes the transfer of assets smoother and quicker when you pass away.
Another benefit of a living trust is its flexibility. You can change, update, or even cancel the trust at any time as long as you’re mentally capable. This allows you to adjust the trust if your circumstances change, like if you have a new child or your financial situation shifts.
Testamentary Trusts
A testamentary trust is different because it’s created through your will and only takes effect after you die. Unlike a living trust, a testamentary trust doesn’t help your family avoid probate. Any significant assets must go through probate before they can be managed according to the trust’s rules.
Some people may choose a testamentary trust specifically because it will require court involvement in the probate process. A testamentary trust can be useful if you want to provide for minor children or beneficiaries but want to make sure that there is some oversight over the administration of the trust.
One of the downsides of using a testamentary trust is the public nature of the probate process. Your last will and testament and the terms of the trust can become part of the public record.
Key Differences to Consider
- When It’s Created: A living trust is created while you’re alive and can be used immediately. A testamentary trust only starts after you pass away.
- Probate: A living trust helps avoid probate, making the transfer of assets quicker and private. A testamentary trust will often require probate, which can delay the administration process and make it public.
- Flexibility: A living trust allows you to make changes during your lifetime. A testamentary trust is fixed and can’t be changed once you’re gone.
Which Trust Should You Choose?
Deciding between a living trust and a testamentary trust depends on your personal goals, your assets, and what your family needs. We most commonly recommend the use of a living trust, as it more closely matches most of our clients’ goals. But there are circumstances in which a testamentary trust can make sense.
Talking to an estate planning attorney can help you decide which option is best for you. We work with our clients, advising and guiding to help ensure that trust conditions are established to handle and distribute assets as intended.