Living Trusts vs. Testamentary Trusts

Debie here. In one of my earlier blogs, we chatted about the five types of trusts and then in detail about Revocable Trusts. Today, I want to focus on Living Trusts vs. Testamentary Trusts, and Funded vs. Unfunded Trusts.

A Living Trust is also known as an Inter Vivos Trust. It is created during your lifetime. It is designed to make your assets more easily transferable to your beneficiaries without the expense and burden of probate proceedings. A Living Trust may be revocable or irrevocable. It can also be unfunded and funded, which we discuss below. Again, if the trust is irrevocable, the trust assets are harder to obtain once placed in the trust. Therefore, you may desire to have a Revocable Living Trust which would allow you to have more flexibility and access to your assets. A Living Trust allows you to use or spend down the assets of the trust while you are alive. And once you pass, the trustee disperses the assets to the designated beneficiaries.

The main benefit of a Living Trust is avoiding probate and publicity. As we have discussed in prior blogs, probate can be long and costly and is very public. Creating a Living Trust will have upfront costs of transferring assets into the trust, but again, avoids probate court costs and publicity. In your Living Trust, you can set clauses or stipulations that would control the assets being dispersed to either your minor children or your grown children who aren’t great with money. A wonderful thing about the Living Trust is that it allows your trustee or successor trustee to take over if you become incapacitated. In order to determine your need for a Living Trust, you need to determine your assets and your plan for the future, including your future generations.

A Testamentary Trust is a trust that is created on your death. Because your death is required, it is irrevocable. It is a trust that is described in detail in your will by a clause or stipulation. The clause or stipulation instructs the executor of your will to create a trust. Remember, your will has to go through probate to determine if it is a valid will. So once your will is determined to be valid, the testamentary trust can be formed. Once formed, the executor of the will should follow the directions of the will to transfer the property into the testamentary trust. But note, that because the testamentary trust isn’t protecting your assets from probate, your desires to disperse your assets your way, may not go according to your plan. That’s the benefit of a funded Living Trust. So why have a Testamentary Trust? Here are few reasons:

  • Reserving assets for your children from another marriage;

  • Protecting and providing a lifetime income to your spouse;

  • Ensuring the care of a special needs beneficiary;

  • Stopping minors from inheriting property at age 18 or 21;

  • Allows you to skip the surviving spouse as a beneficiary; and

  • You can give to charities.

So what’s the difference between a Funded Trust and an Unfunded Trust. Well, a funded trust merely means you have gone and assigned or transferred your assets into the trust. This protects your assets.

An unfunded Trust is a trust that you’ve placed a dollar or two into the trust. The unfunded Trust holds no assets. It’s just a trust in name only. An unfunded trust may obtain assets upon your death or may never become funded. Because the unfunded trust may obtain assets on your death, your estate must be probated.

To ensure (i) protection of your assets; and (ii) your estate plan, call me, Deb, 646.592.5311 to discuss these types of trusts in more detail.