What is a Living Trust vs Testamentary Trust?

HomeBlogEstate PlanningWhat is a Living Trust vs Testamentary Trust?

You and your attorney may create a living trust (or inter vivos trust) during your lifetime. In contrast, your last will and testament creates the testamentary trust when you pass away. A testamentary trust does not exist until after death. Let’s look at the advantages and disadvantages of a living trust vs testamentary trust.

What is a Trust?

A trust is simply a legal framework that manages your assets and real estate. As the creator of a Living Trust (revocable trust), you can choose to act as your own trustee or ask someone else to act as trustee. The trustee handles your estate and distributes your assets to specified beneficiaries after you pass away.

A trust is ideal if you want to legally protect your property and assets. By transferring them into the trust, they will no longer be in your name; instead, the trust itself becomes their owner. The trustee that you choose to oversee these assets then acts as an intermediary between yourself and those possessions.

How Does a Testamentary Trust Work?

A testamentary trust only exists as part of a last will and testament. It does not come into existence until after the trust creator’s death.

The grantor (trust creator) leaves instructions in their will for who should act as their named executor. The executor then details how a trustee should manage assets and distribute them to heirs.

Advantages of Testamentary Trusts

Testamentary trusts take effect from instructions in a will and only take effect after the grantor’s death.

The only advantage to a testamentary trust is that you don’t need to fund it while alive. Instead, your last will and testament names the assets you’d like to pour into your trust after death.

Once the assets pour into the trust, the trustee handles the estate and avoids the probate process. Most individuals choose a testamentary trust to avoid the probate court process for their loved ones.

How Does a Living Trust Work?

An inter vivos, or living trust, allows you to access assets and place them in or out of the trust as you desire. As trustee, you may place real estate property, estate assets, and other property in the trust and remove them just as easily.

A living trust helps you plan for your heirs’ future before you die, but more securely, with more options for distributing those assets.

Like a last will, creating a living trust is an excellent way to organize your assets and liabilities before passing them on to your loved ones. It allows you to set up legally binding instructions so that everything will be taken care of without any hassle or unexpected surprises when the time comes.

With a living trust, you completely control the timing and distribution of your assets. An inter vivos trust gives you the power to create a good future for your heirs by prescribing when and how much they will receive.

For a revocable living trust to be fully operational, you must “fund” it. This requires that you title your assets in the name of the trust. Unfortunately, if this crucial step fails to occur, probate will likely be necessary.

Advantages of Living Trusts

Just a few of the many benefits of an inter vivos trust include incapacity planning, protection for your heirs, and avoidance of probate.

Protects You In Case of Incapacity

We are all at constant risk of suffering a disastrous accident or illness that could render us incapable of caring for ourselves or loved ones. Incapacity can be temporary, or it can last until we die. 

While it is challenging to consider such a situation in our own lives, it’s crucial to do some financial planning to prepare! 

The total cost of incapacity, which may include lost wages and the cost of required medical care, is difficult to calculate. However, it can quickly become very costly: the average cost of assisted living in the United States in 2020 was $4,300 per month.

A revocable living trust protects you by providing instructions on how to financially support you during incapacity. A revocable living trust also allows you to choose who will handle your finances when you cannot handle them yourself. And you can change your mind at any time and alter your trust as your life circumstances change, as long as you have mental capacity.

Protects Your Loved Ones

A revocable living trust also protects your loved ones. It provides specific instructions for what you want to happen in case of incapacity or death.

With a living trust, your loved one will not be left guessing what you would have wanted. They won’t need state law to determine who should handle your financial and end-of-life affairs.

Protects Inheritance Money for Your Loved Ones

If you want to leave property to someone, you can use a living trust. The trustee will ensure that the right people get the property at the right time and in the right amounts.

Some heirs inheriting property outright can manage a significant gift when they turn 18. Others might need a monthly lifetime income distribution because of drug, spending, or gambling issues. Each beneficiary may need the trust created with their struggle in mind.

If you have an heir with special needs, they may receive government benefits. Inheriting a lump sum may make them ineligible for their desperately-needed benefits for daily life. Benefits they could lose for disabled or special needs help may include transportation, healthcare, or monthly stipends.

Living trusts allow for the trust owner’s specific desires about the future of the estate assets.

Avoids the Probate Process for Your Loved Ones

Estate administration fees vary widely by state, but they, too, can be very costly. In California, for example, where probate attorney and executor fees are set by law, the attorney and executor fees to probate a home worth $800,000 could be as much as $38,000.

A revocable living trust, however, can avoid probate and the associated probate fees.

Another benefit of revocable living trusts is that they can remain private. Without the instructions in a revocable living trust, family members are often forced to resort to public court processes, which means that the court and other nosy individuals may be prying into your private matters.

Further, a revocable living trust can provide basic marital deduction planning to maximize the use of your and your spouse’s estate tax exemptions so that your loved ones do not face a large estate tax burden after your death.

Finally, using a revocable living trust allows you to protect the money you leave to your loved ones from your beneficiary’s creditors.

Consider an Irrevocable Living Trust to Plan for Long Term Care Needs

Trusts can be either revocable or irrevocable. Revocable trusts can be changed or dissolved by the grantor at any time, while irrevocable trusts are relatively permanent once created.

If you have a revocable trust, you may alter or dissolve the trust at any time. However, an irrevocable trust is much more permanent. So, if you create an irrevocable trust and later change your mind, you may not be able to dissolve the trust and receive your assets back.

Both of these types of trusts have many benefits, though. For example, a living trust allows your estate to avoid the legal proceeding of the probate court and pass assets directly to your heirs. And you don’t lose access to a living trust’s assets since it is revocable. Living trusts can be crucial in avoiding the public nature and legal fees associated with probate courts.

However, an irrevocable living trust has different benefits.

One example is a Medicaid trust –you don’t have ownership of or access to the assets in the trust. Instead, because the trust is irrevocable, Medicaid does not count the assets in the trust against you when they determine your eligibility for nursing home or assisted living benefits.

An irrevocable Medicaid trust allows you to receive Medicaid benefits to pay for long-term care while keeping your hard-earned assets to benefit your beneficiaries.

We Can Help

At Vail Gardner Law, our experienced estate planning attorneys can help you accomplish specific planning goals by setting up a trust to meet your family’s unique needs. Working to prepare legacies is a substantial part of our practice, and we’d love to help you become a trust owner in North Carolina. Contact us today and set up a consultation!