Trusts can be part of your estate plan to transfer assets to your heirs. A trust created while an individual is still alive is an inter vivos trust, while one established upon the death of the individual is a testamentary trust and is generally included within a Last Will and Testament.
Investopedia’s recent article entitled “Inter Vivos Trust vs. Testamentary Trust: What’s the Difference?” explains that an inter vivos or living trust is drafted as either a revocable or irrevocable living trust and allows the individual for whom the document was established to access assets like money, investments and real estate property named in the title of the trust. Living trusts that are revocable have more flexibility than those that are irrevocable. However, assets titled in or made payable to both types of living trusts bypass the probate process once the trust maker dies.
With an inter vivos trust, the assets are either titled in the name of the trust by the owner or name the trust as the death beneficiary. If the assets are titled in the name of the trust, those assets are owned by the trust and are controlled by the trustee and used for the benefit of the individual who created the trust. In a revocable trust, the trust maker (or grantor) is usually the trustee and he or she has total control over and access to his or her own assets transferred to the revocable trust. When the grantor passes away, the beneficiaries (which can be the grantor’s children or grandchildren, or even charities) receives or inherits the trust assets outright. The grantor, however, may decide to keep his or her assets in the trust after death. In that situation, the beneficiaries do not take those assets; their assets are, instead, managed by a successor trustee, who distributes income and/or trust principal to the beneficiaries in accordance with the wishes that the grantor specified in the trust during his or her lifetime.
A testamentary trust (or will trust) is created when a person dies, and the trust is set out in their last will and testament. Because the creation of a testamentary trust doesn’t occur until death, it’s irrevocable. The trust is a created by provisions in the will that instruct the executor (now called the Personal Representative in Massachusetts) of the estate to create the trust. After death, the will must go through probate to determine its authenticity before the testamentary trust can be created. After the trust is created, the executor follows the directions in the will to transfer property into the trust.
A testamentary trust doesn’t protect a person’s assets from the probate process. As a result, distribution of cash, investments, real estate, or other property may not conform to the trust owner’s specific desires. A testamentary trust is designed to accomplish specific planning goals like the following:
- Preserving property for children from a previous marriage
- Protecting a spouse’s financial future by giving them lifetime income
- Leaving funds for a special needs beneficiary
- Keeping minors from inheriting property outright at age 18 or 21
- Skipping your surviving spouse as a beneficiary and
- Making gifts to charities.
However, these same objectives in a testamentary trust can also be achieved in an inter vivos trust, that is, revocable or irrevocable trust . The two biggest advantages to using an inter vivos trust is the avoidance of probate at death and the opportunity to reduce estate taxes for married couples. Estate taxes can be substantial and can reduce the legacy that individuals and families envisioned to pass to their children and grandchildren. Thus, the use of trusts can be a very good financial planning vehicle.
Reference: Investopedia (Aug. 30, 2019) “Inter Vivos Trust vs. Testamentary Trust: What’s the Difference?”