As you begin to think about creating your estate plan or updating your existing one due to a life change, such as the birth of a grandchild or a gray divorce, you’ll probably hear the terms testamentary trust and living trust used in various contexts.
If you are unfamiliar with these two estate planning tools or are unsure of their meaning, understanding the differences between them can become confusing. However, both trusts are important in estate planning. Each serves different but useful purposes depending on your estate planning needs and goals, which can change throughout a lifetime.
Here are a few things to know about testamentary and living trusts before deciding which are right for you and your estate plan.
What is a testamentary trust, and why might you want one?
Part of a will, a testamentary trust helps provide for minor children, those who are disabled, or those who, for whatever reason, may not be responsible with money and would fare better with some supervision. In addition, a testamentary trust can prevent beneficiaries from receiving their inheritance all at the same time or until they reach the age you specify.
A testamentary trust is created at the time of the decedent’s death. It is, therefore, revocable by the creator during their lifetime. A testamentary trust does not exist when you are alive. While you are living, you can change your will at any time and omit the provision that would create a testamentary trust upon your death.
As part of your estate, any money or assets you have designated to be part of a testamentary trust will first be subject to probate when you die. Once your will has been probated, the person you have named as your executor can then transfer those assets and whatever amount of money you have decided on in your will into the testamentary trust.
A trustee who you name in your will is the individual responsible for enforcing any rules you have likewise laid out in your will about how the trust will be managed. For example, those rules can determine which assets in the testamentary trust will be distributed to its beneficiaries and when.
What is a living trust, and why might you want one?
Living trusts are sometimes called inter vivos trusts. Living trusts are exactly how they sound; they are created during the creator’s, or as they are often called, grantor’s, lifetime.
There are two types of living trusts: revocable living trusts and irrevocable living trusts.
Revocable living trusts
During the grantor’s lifetime, a grantor can manage the assets in the trust as they see fit. They can buy and sell assets as well as add or delete beneficiaries should they so choose.
A grantor can dissolve the trust at any time during their lifetime. However, immediately upon the grantor’s death, the revocable trust will become irrevocable.
People often opt for revocable trusts because of the flexibility they offer. Some people want to have the security that their money and assets are available should they need them. Some may want the opportunity to make adjustments as their family changes or grows. Some may wish to exert control over their beneficiaries while they are alive. The bottom line is revocable trusts offer options.
Irrevocable living trusts
A grantor can create an irrevocable trust during their lifetime. However, the grantor relinquishes all control over the management of the trust once they fund it. Consequently, the grantor of an irrevocable trust will not be able to serve as its trustee.
However, the grantor can name a trustee to manage the trust during the grantor’s lifetime and after the grantor dies. However, unless the grantor makes some provision for themselves to become a beneficiary to the trust, they may not remove any money or assets from it.
There may be state-specific tax benefits associated with creating an irrevocable living trust. When deciding whether to create an irrevocable living trust, it is best to speak with a tax professional familiar with Washington State tax laws.
At Elise Buie Family Law, our team of Seattle estate planning lawyers can work alongside your tax experts.
Do trusts need to go through probate?
As mentioned earlier, the contents of a testamentary trust are subject to probate because it is created at the time of the decedent’s death. In other words, the money and assets belonging to the decedent before death are part of their estate.
On the contrary, both a revocable and irrevocable living trust can avoid the probate process altogether. This is because the contents of these trusts are owned by the trust itself, not the decedent. The trust continues to exist even after the grantor of these types of trusts dies.
How can you make testamentary and living trusts part of your estate plan?
Thinking about what will happen to our loved ones and finances after you die is probably not at the top of your list of favorite things to think about. However, it is important to make these arrangements while you are still in good physical and mental health.
Also, estate planning can get complicated quickly. For example, an estate plan can include more than one trust and more than one type of trust at that. Likewise, if you are going through a divorce, there will be issues specific to your situation that will need to be addressed before your divorce is finalized and issues that come up afterward.
Our Seattle estate planning lawyers have decades’ worth of cumulative experience creating estate plans to fit any circumstance, as well as updating estate planning documents you may already have. In addition, we will take into consideration any major life events that have occurred recently or are coming up in the foreseeable future so that your family is protected when you are gone, giving you the peace of mind you deserve. Reach out to our office today.