What is a Living Trust? How is it different from a Testamentary Trust?
June 29, 2015 - Posted by: admin - In category:
When and why is a Trust considered “living”?
There are many different kinds and flavors of Trusts. Because of the great diversity of Trusts, we utilize different categories and groupings to distinguish certain Trusts from other types of Trusts. Among the most basic distinctions in the world of Trusts is that of a Living Trust vs. Testamentary (i.e. non-living) Trust. A Living Trust is a legal entity that has been established during the life of the maker of the Trust (such Trust-maker is sometimes referred to as the Trustor and/or Grantor). I would guess that 75% or more of all existing Trusts in the State of Utah, as well as those existing in other states, are of the Living Trust variety. Again, these are Trusts that are established during the life of the maker of the Trust. Why is this important? That depends on who is asking the question and who is responding to the same. Below are a few ideas:
A good number of individuals who establish Trusts do so in part because they desire to have the benefits and protections of such Trust during their lives, after their disability and following their death. It stands to reason therefore that in order to grant such important legal protections, the legal entity offering such protections and benefits must be in existence at such time. The concept of probate avoidance is also very significant in this discussion. If you are looking to obtain probate avoidance through the use of a Trust, then such Trust must be put into existence during your life, with all applicable assets funded into such Trust. Otherwise, you must have other viable methods to avoid probate or probate is where your estate will be settled. To summarize, these common and oft-seen Living Trusts are established during the life of the maker of such Trust and thereby can offer lifetime benefits and protections, as well as probate avoidance and the ability to have an orderly transition of assets after death. I say “can” offer these benefits because whether or not such benefits and protections are in fact enjoyed and obtained depends in large measure on how well the Trust was designed, maintained and funded with assets–but that is a discussion for another day.
In contrast to the Living Trust, a Testamentary Trust is NOT established until after the death of the Trust-maker. Such Testamentary Trust is, as the name implies (i.e. testament refers to a Will, which is often designated as a “Last Will and Testament”), established and governed by the applicable Will instrument. Since we are talking about administering an estate primarily through a Will, you then know that rather than avoiding probate, we will in fact be utilizing probate as the mechanism for settling such estate. Does this mean that a Testamentary Trust is a bad thing in and of itself? Of course not. There are valid uses for Testamentary Trusts and even some very unique benefits that can be realized only with Testamentary Trusts. Even so, we find that most often people can obtain the benefits and protections they are seeking through the use of Living Trusts and such people are usually not good candidates for (or otherwise interested in) the particular characteristics of a Testamentary Trust.