Livings trusts and testamentary trusts are two of the tools in the estate planning toolkit. In this post, we will take a look at the reasons why these trusts are used and explain the major difference between them.
A living trust is a trust that goes into effect as soon as you sign it, so it becomes active while you are still alive. The revocable living trust is the most common type of living trust, and this type of trust is a very good alternative to a simple will for a number of different reasons.
As the name would indicate, you can revoke the trust if you ever choose to do so, and you would act as the trustee while you are living. Your access to your resources would not change after you convey them into the trust, so this should not be a source of concern.
You would name a successor trustee to assume the role after your passing, and your heirs would be the successor beneficiaries. The trust would become irrevocable after your passing, and the principal would be protected from creditors and most litigants.
If you do not want to provide direct, lump sum inheritances all at once, you can instruct the trustee to distribute a certain amount each month or on some other incremental basis.
Another major advantage that a living trust will provide is the avoidance of probate. This is a legal process that takes place under the supervision of a court.
When a will is used, it is admitted to probate, and a time-consuming process ensues. No inheritances are distributed while it is underway, and expenses steadily accumulate. Plus, the general public can access probate records to pry into the final affairs of the decedent.
When assets are distributed through the terms of a living trust, the probate court is not involved, so these drawbacks are avoided.
A testamentary trust is a trust that is provided for in your will. It would instruct the executor to establish the trust after you pass away, and it would become active at that time.
The executor could act as the trustee of the testamentary trust, but this is not a requirement.
These trusts are most commonly used to provide for minor children. Since they cannot handle their own resources, the trustee would administer on their behalf.
It is possible to use a testamentary trust in conjunction with life insurance. You can make the trust the beneficiary of an insurance policy on your life, and your child would be the beneficiary of the trust.
Regardless of the source of the funding, you can allow the beneficiary to have direct control of the assets when they reach an adult age of your choosing.
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