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Regarding estate planning, you want a comprehensive solution that takes your objectives seriously. You may be advised to establish a trust to protect and manage your assets. First, you need to understand the difference between a testamentary trust vs living trust.
Before you compare a testamentary trust vs a living trust, you must know what each one is. A testamentary trust is established by a will and takes effect after the grantor’s death. On the other hand, a living trust is created and executed during your lifetime.
How is a Testamentary Trust Different from a Living Trust?
A testamentary trust and a living trust may both be used in estate planning. Still, they serve different purposes and have distinct characteristics. Here are the key differences between these two tools:
1. Creation
The main difference between a revocable living trust vs testamentary trust is how they are created. A testamentary trust is created by including specific instructions in a person's will. This type of trust only becomes operational upon their demise. Living trusts are established while the grantor is alive and can take immediate effect.
2. Probate
How a testamentary trust vs a living trust is a major factor to consider. Placing assets in a living trust can help avoid probate process, saving valuable time and money. Unlike living trusts, testamentary trusts must go through probate court, which can be a lengthy and legal process.
They are included in the public record during the probate process. However, a living trust remains a confidential document and is not subjected to public scrutiny.
3. Revocability
A testamentary trust is established after the grantor's death and can’t be revoked. In contrast, a living trust is typically revocable during the grantor's lifetime, giving them the flexibility to make or cancel changes. However, it becomes an irrevocable living trust once the grantor passes away.
4. Control
In testamentary trusts, control is transferred to a trustee only after the grantor's death. A living trust differs from a testamentary trust in this regard. Living trusts offer a unique advantage where the grantor can serve as the initial trustee and maintain control during their lifetime.
The terms of the trust aren’t set in stone while you are alive. With provisions for successor trustees, this type of revocable trust provides flexibility and peace of mind.
5. Tax Implications and Expenses
While Arizona and Nevada don’t have estate and inheritance taxes, you must still be mindful of federal estate taxes. You must consider the expenses for beneficiaries with a testamentary trust vs a living trust. In both cases.
The probate process is costly because of how lengthy the process can be, which will use funds from the trust. At the end of this process, your beneficiaries will eventually have less of your money. This is something to consider with a testamentary trust vs a living trust. All income generated by a trust is considered taxable.
6. Funding for Trusts
Understanding the difference between a testamentary trust and a living trust is crucial when planning your estate. A testamentary trust is funded after death, with assets specifically designated in the will. However, a living trust must be funded during the grantor's lifetime by transferring assets into the trust. By clearly grasping these distinctions, you can ensure your assets are distributed according to your wishes.
7. Purpose
Testamentary trusts are specifically designed to fulfill specific purposes, such as distributing assets to minors or dependents. This is the main advantage of a testamentary trust. Living trusts offers a broader range of benefits, including ongoing asset management, incapacity planning, probate avoidance, and estate tax planning.
8. Cost and Maintenance
When comparing living vs testamentary trusts, you need to examine how a trust is established and maintained. Setting up a testamentary trust can be simple and cost-effective. Unlike other types of trusts, a testamentary trust is created as part of the will.
A living trust often requires ongoing management and attention to ensure its effectiveness. You must allocate additional time and resources to properly administer the trust, potentially resulting in higher legal fees. While it offers numerous benefits, it is essential to recognize the commitment involved in managing a living trust.
Protect Your Assets for Your Loved Ones
When deciding between a testamentary trust vs living trust, it's important to consider your specific needs, family situation, and financial factors. Seeking professional financial planning is typically advised to make an informed decision.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
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