Updated: Oct 4, 2021
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. 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 if you need a Living Trust, you should determine what your assets are and make a plan for your future, including your future generations.
Testamentary Trusts are Trusts that are created upon your death. Because your death is required, it is irrevocable (it’s pretty hard to change things from the grave). This kind of Trust needs to be 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 valid. 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 Will’s directions to transfer the property into the Testamentary Trust. But note that because the Testamentary Trust isn’t protecting your assets from probate, the disbursement of your property may not go according to your wishes. 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;
And prohibiting minors from inheriting property at age 18 or 21.
It also allows you to skip your surviving spouse as a Beneficiary and to give to charities.
Really quickly, what's the difference , what’s the difference between Funded or Unfunded Trusts? Well, a Funded Trust merely means you have assigned or transferred your assets into the Trust. This protects your assets.
You can opt to have an Unfunded Trust by only placing a dollar or two into it. The unfunded Trust holds no assets. Basically, it’s a Trust in name only. It may obtain assets upon your death or may never become funded. Because the Unfunded Trust may obtain assets on your death, it won’t keep your estate from being 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.