Many individuals make the mistake of assuming that drafting a will is the most critical aspect of estate planning. While a will is undoubtedly an important part of the process, preparing a health care proxy, advanced directive, and financial power of attorney are also essential.
Funding a trust is another often-overlooked part of estate planning. Establishing one of these can minimize the chances of your heirs mismanaging your estate.
There are several different types of trusts to choose from. Two examples are testamentary and living trusts. The latter can also be referred to as a lifetime or inter vivos trust. The distinction between each of these popular trusts will be detailed below.
How testamentary trusts work
A testamentary trust doesn’t go into effect until the trust’s owner dies. However, the testator can outline which assets they wish to use to fund their testamentary trust after their passing when drafting their will. Testators can have multiple testamentary trusts funded with different assets, distribution instructions, named beneficiaries and trustees.
How living trusts compare to testamentary ones
Living or inter vivos trusts are different from testamentary ones in that the former goes into effect as soon as a trustor funds it.
Also, testamentary trusts are revocable, meaning the trustor can make changes to it until their death. A testamentary trust only becomes irrevocable upon its owner’s death. In contrast, a trustor can opt to make their living trust either irrevocable or revocable, meaning that the trust’s owner can relinquish their right to make changes to the trust or preserve that control unless they choose otherwise up until their death.
Another difference between testamentary and living trusts is how a trustor’s choice between the two impacts the probate process. The funding of a testamentary trust doesn’t skirt the New York probate process since the trustor’s assets remain under the trust owner’s control up until they die. In contrast, the estate belonging to someone who had a living trust avoids being probated since their funding of the trust occurred with their lingering assets occurred while they were still alive.
While the comparisons above describe some of the differences between testamentary and living trusts, you may want to explore additional details surrounding them, including the tax implications of choosing one option versus another. Any additional information that you uncover may be helpful in deciding which option, if any, is an ideal choice for you.