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TL;DR: A living trust (inter vivos trust) is set up while you're alive to avoid probate and manage assets. A testamentary trust is created through your will and starts after death. Both have pros and cons—choose based on control, cost, and flexibility. Always seek professional help when creating a trust.
Main points:
- A living trust (aka inter vivos trust) is created and active during your lifetime.
- A testamentary trust is created through your will and begins after your death.
- Revocable living trusts allow changes while you're alive; testamentary trusts do not.
- Living trusts help you avoid probate; testamentary trusts do not.
- Living trusts require more upfront setup and ongoing management.
- Testamentary trusts may be simpler but involve probate and public records.
- Tax implications and funding methods differ for each trust type.
- Inter vivos trust vs testamentary trust comparisons highlight timing and control.
- Testamentary trust vs revocable trust decisions focus on flexibility and legal complexity.
- Setting up a living trust involves listing assets, naming trustees, creating documents, and transferring ownership.
- Always consult estate planners or attorneys to choose the right trust for your needs.
Regarding estate planning, you want a comprehensive solution that takes your objectives seriously. A professional may advise you 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.
What Is a Living Trust?
A living trust is a legal document you create while you're still alive. You use it to manage your assets while you’re living and after you pass away. You place these assets into the trust and name a trustee to manage them. Most people name themselves as the initial trustee, which lets them stay in control.
Some people also refer to a living trust as an inter vivos trust. If you’re looking to compare an inter vivos trust vs a testamentary trust, then, you should find this helpful. There are two types of living trusts:
- Revocable living trust (you can change or cancel it during your lifetime)
- Irrevocable living trust (you give up control once it’s created, and changes require beneficiary approval)
And in the debate of a testamentary trust vs revocable trust, most people choose the revocable option if they want more control and to avoid probate.
What is a Testamentary Trust?
A testamentary trust is a trust you set up through your will. It doesn’t exist until after you die. Your will includes instructions for creating the trust, naming a trustee, and listing which assets should go into it. Once the court validates the will through probate, the testamentary trust begins.
How is a Testamentary Trust Different from a Living Trust?
Some people may use a testamentary trust and living trust in estate planning. Still, they serve different purposes and have distinct characteristics. Here are the key differences between testamentary trusts vs living trusts:
1. Creation
The main difference between a revocable living trust vs testamentary trust is the manner of creation. A person creates a testamentary trust by adding specific instructions to their will. The trust starts working only after they pass away. The grantor sets up a living trust while alive, and it takes effect right away.
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.
The court includes them in the public record during probate. However, a living trust remains a confidential document and won’t face 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. It gives the grantor 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 let the grantor act as the first trustee. This helps them keep control of the trust while they are alive.
You can change the terms of the trust while you are alive. With provisions for successor trustees, this type of revocable trust provides flexibility and peace of mind.
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5. Tax Implications and Expenses
Arizona and Nevada don’t have estate and inheritance taxes. But you still need to watch out for 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. The IRS considers all income a trust earns as taxable.
6. Funding for Trusts
Understanding the difference between a testamentary trust and a living trust is crucial when planning your estate. The will designates certain assets, and those assets fund the testamentary trust after death. The grantor must fund a living trust while alive by moving assets into it. If you understand these differences clearly, you can make sure your assets go where you want them to.
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
- estate tax planning
You should keep this in mind before choosing an inter vivos trust vs a testamentary trust.
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. A person creates a testamentary trust as part of their will, unlike other types of trusts.
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.
How to Create a Living Trust
Creating a living trust is simpler than most people think. Here’s how to do it, step by step:
- Start by writing down what you own: real estate, bank accounts, investments, and valuables.
- Choose your trustee. Most people name themselves as the trustee. You’ll also pick a backup (successor trustee) to take over when you can’t manage the trust anymore.
- Pick the beneficiaries of your living trust.
- Produce the trust document. You can work with an estate planning attorney and financial advisors to help you create the living trust rules and conditions.
- Transfer your assets to the living trust. You must re-title assets into the name of the trust. Again a legal professional can help you with this.
Protect Your Assets for Your Loved Ones
When deciding between a testamentary trust vs living trust, consider your needs, family situation, and financial factors. Seeking professional financial planning helps you make an informed decision.
Let the experts at Asset Preservation Wealth and Tax help you build an estate plan for you. We have access to estate planning attorneys, tax professionals and wealth managers. They can give you a holistic plan that shapes a future that you want.
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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.
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