In estate planning, there are two main categories of Trusts. The first is known as a “Testamentary Trust.” This is a Trust established through a person’s Last Will and Testament. In other words, there is no separate “Trust document.” The Testamentary Trust us usually just a section of the Will that appoints a Trustee to administer and distribute Estate assets after the probate of the Will is completed. Typically, the Testamentary Trust does not even come into existence until after the Testator dies and the Will is admitted to probate.
The second type of Trust is called a “Living Trust” (also called a “Revocable Trust” or a “Revocable Living Trust”). The name doesn’t really matter—it’s more important what the Living Trust says and does. As with a Testamentary Trust, the Living Trust appoints a Trustee to administer and distribute assets. However, unlike the Testamentary Trust which is contained in the Will, the Living Trust is a free-standing document, separate from a Will. As such, the Living Trust comes into existence during the Grantor’s lifetime. In addition, assets are usually transferred into the Living Trust while the Grantor is alive.
Perhaps the single most important difference between the two types of Trusts is that with the Testamentary Trust, probate is still required. The Testamentary Trust doesn’t have anything in it until the assets go through probate and are then deposited into the Testamentary Trust. On the other hand, with the Living Trust, the assets which are transferred into the Trust can be administered without probate. This saves significantly on time and money. In addition, many financial institutions will not allow a Testamentary Trust to be named as beneficiary on an account or insurance policy. This is not the case with a Living Trust.
An example may help demonstrate the difference between the two Trusts. John and Tom, both single fathers, each set up some estate documents. John executed a Last Will and Testament which had language establishing a Testamentary Trust upon John’s death in order to provide for John’s minor children. Tom set up a Living Trust, also to provide for his minor children.
John and Tom each owned a home, a bank account, and some life insurance. After executing his Will, John tried to name the Testamentary Trust in his Will as the beneficiary on his bank account and life insurance. In both instances, the bank and the insurance company would not allow the Testamentary Trust to be named as beneficiary because that Trust did not really come into existence until John’s death. In order to reach John’s Testamentary Trust, these assets would first have to go through probate.
On the other hand, Tom was able to name his Living Trust as beneficiary on his account and life insurance policy. As the bank and the insurance company told Tom, this was a common practice. In addition, during his lifetime, Tom transferred his home into his Living Trust.
Sadly, John and Tom both died together in a car accident. John’s assets, including the home, bank account, and life insurance all had to be administered through a probate court. This took approximately one year and cost over $5,000 in lawyer fees and costs. John’s beneficiaries were not happy about having to do this. However, in Tom’s case, his home was already in the Living Trust. At Tom’s death, the bank account and life insurance were paid over into the Living Trust. The Trustee, who Tom selected, was immediately able to take control of the assets. No probate was required. This saved time, money, and frustration. Tom’s family was happy he made the decision to set up the Living Trust.
