Testamentary Trust vs Revocable Trust
Testamentary Trust vs Revocable Trust

Understanding trusts can be daunting, but knowing the differences between various trusts can ensure your assets pass on according to your wishes after your life’s end. In the Tar Heel State, two of the most commonly discussed trusts are the Testamentary Trust and the Revocable Trust.

Though they both serve to protect your assets, they operate differently and cater to different needs. So let’s look at the differences between the Testamentary Trust vs Revocable Trust, highlighting their respective benefits and considerations. Learn how you can make an informed decision about your estate planning needs.

What is a Testamentary Trust vs Revocable Trust in North Carolina?

A Testamentary Trust only comes into existence after the death of the grantor (trustmaker). An action of the last will and testament typically creates it. Its primary purpose is to ensure that the grantor’s assets are distributed according to their wishes. This is particularly helpful when beneficiaries might be minors or otherwise unable to manage their inheritances effectively.

You don’t need to put everything into your testamentary trust; you can still give away assets directly to some beneficiaries through the will. The trust will last as long as you specify, until the trustee distributes money and assets in it according to your wishes. You can also open more than than one testamentary trust. For example, you might create separate testamentary trusts for your children and spouse. (1)

On the other hand, a Revocable Trust, often referred to as a “living trust,” is established during the grantor’s lifetime. This type of trust allows for assets to pass on to beneficiaries without the probate court process. Avoiding probate provides a swifter and often more private distribution process.

Both trusts offer unique advantages depending on individual circumstances and estate planning goals in the state of North Carolina. Let’s look at the differences more in-depth.

Could a Testamentary Trust Be What Your Loved Ones Need?

Avoiding probate court is one of the main reasons individuals create a revocable living trust instead of relying on a will to transfer their assets to their beneficiaries.

Probate is the court process during which a court declares a will legally valid. The court also oversees the process of paying the estate’s debts and taxes. They eventually distribute remaining money and property to the individuals or organizations named in their will.

There are pros and cons to probate, and after weighing them, some people may prefer to establish a testamentary trust. This type of trust allows an individual’s money and property to go through probate. Once the court validates the will, the will forms the testamentary trust and the money and property goes into the trust. The trustee then distributes assets to the heirs named in the trust document.

There are other reasons why a testamentary trust may be a good legal arrangement for you. For example, they allow you to direct the amounts and timing of distributions to beneficiaries and reduce the upfront costs associated with the creation of the trust.

Problems With Probate Court and Testamentary Trusts

In deciding whether a testamentary trust is right for your family or loved ones, consider whether avoiding probate is a priority for you and evaluate the pros and cons, which may vary depending on jurisdiction and the size of the assets in your estate.

Probate is Expensive in Many Cases

The fees your estate must pay during the probate process will vary depending on the size and complexity of the estate as well as state law, which sets the amounts charged for court filings. In North Carolina and also for larger estates, probate can be very expensive.

During the probate process, an estate may have to pay the following:

  • Court fees
  • Executor fees
  • Attorney fees
  • Accounting fees
  • Appraisal and valuation fees
  • Probate bond
  • Legal fees for any will contests
  • Paying fines or fees from fraudulent claimants who saw your public estate (trusts are private but probate is NOT.)
  • Other miscellaneous fees

These expenses can quickly add up and reduce the amount your beneficiaries will ultimately receive.

Probate may also be time-consuming and delay the distribution of funds from a testamentary trust for months or years. If your estate is worth less than $20,000 as a single person or $30,000 as a couple, a testamentary trust can make sense.

Probate is Public

However, because probate is a matter of public record, some documents, including your will and information about the testamentary trust it creates upon your death, can be accessed by any member of the public, resulting in a lack of privacy.

As a result, personal information about your family and other beneficiaries, including who is inheriting and the types of money and property they are inheriting, is available for anyone to see.

In contrast, a revocable living trust does not become part of the public record, allowing the identities of your beneficiaries and the details about your estate to remain private.

Probate Court Involves a Courtroom and a Judge Overseeing the Process

Because it is a court process, probate involves oversight by a judge or court clerk until all distributions have been made.

Trustees of a testamentary trust may need to meet regularly with the probate court, which will monitor its administration until the trust expires.

While some may find this oversight burdensome, it may provide peace of mind for those who want additional assurance that the trust will be administered as they intended.

Probate Can Take Time

Beneficiaries under a will generally receive the money or property outright as soon as the probate court authorizes distributions. However, a custodial account may hold inheritance for minor children until they reach the age of majority.

If members of the family contest the will or the terms of the last will made, a will contest may ensue. These types of situations rarely resolve without years of financial drain on the estate and emotional drain on the family.

Maintain Control Over the Distribution of Money and Property

With both a revocable trust created while you are living and a testamentary trust created after your death, the terms of the trust can specify the timing and amounts of the distributions to your beneficiaries.

Although a testamentary trust is created by your will when you pass away, you can still outline the instructions for the trust in your will during your lifetime. And you can change them at any time while you are alive.

A testamentary or living trust may be beneficial for parents of:

  • Young children: a trustee can manage the funds for their benefit
  • Adult children who have many creditors or poor spending habits. It may also protect adult children’s funds in the event of divorce by safeguarding their inheritance during the division of property
  • Disabled children who need ongoing support and need to maintain eligibility for government benefits

Who Distributes Assets in a Trust Fund? How Do They Know How?

The trustee you name in your will has a responsibility to make distributions in accordance with the instructions you provide in your will. As a result, you can provide your family members with the resources they need over the long haul until the trust terminates.

You can specify if you want the trust to continue until your children reach a certain age or meet a particular milestone.

In addition, you can instruct about what the distributions are for, such as costs associated with your children’s health, education, maintenance, or support.

Should You Defer Creation of the Trust Until You Pass Away?

A revocable living trust is typically more expensive to create, so a testamentary trust is a good option if you need to minimize costs now but think a trust will ultimately benefit your family members and loved ones.

A testamentary trust is created and funded after you pass away, and the costs of establishing it are borne by your estate, making it a more affordable option during your lifetime.

This also means that you will not have to change ownership of any accounts and property during your lifetime since this will be part of the funding process after your death.

Your wealth may have time to grow over the course of your lifetime, and your estate may be better able to cover the costs of establishing a trust when you pass away.

Bottom line is that revocable living trusts and testamentary trusts both offer benefits that can ensure that your wishes are carried out and your family and loved ones are cared for.

An Estate Planning Attorney Can Help

If you are unsure about which type of trust you should include in your own estate plan, call us today to set up an appointment. Our estate planning experience at Vail Gardner Law ensures that you receive comprehensive advice tailored to your needs. We ensure our clients have a clear understanding of their options and the potential outcomes of their choices.

With our guidance, you can confidently navigate the intricacies of trusts and other estate planning tools, ensuring a secure future for both you and your loved ones. Your peace of mind is our utmost priority, and we’re here to guide you every step of the way.

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