Estate Planning
September 7, 2023

Testamentary Trust vs Living Trust: 8 Key Differences

Stewart Willis

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. 

Person signing a will

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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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