Can I Have Both a Living Trust & a Testamentary Trust?

By John Cromwell

Estate planning is about ensuring that your property goes to your designated beneficiaries as quickly as possible, while at the same time minimizing any estate taxes. To achieve these goals, you may need to use several different types of legal devices. Trusts are one type of device that is commonly used in estate planning. There are two types of trusts: living and testamentary. You can use both types of trusts, but it is important to understand how both types work and how the two can work together in an estate plan.

Estate planning is about ensuring that your property goes to your designated beneficiaries as quickly as possible, while at the same time minimizing any estate taxes. To achieve these goals, you may need to use several different types of legal devices. Trusts are one type of device that is commonly used in estate planning. There are two types of trusts: living and testamentary. You can use both types of trusts, but it is important to understand how both types work and how the two can work together in an estate plan.

Trust Basics

Regardless of its type, a trust is composed of a grantor, a trustee and at least one beneficiary. The grantor creates the trust by transferring some of her property to a trustee. Prior to donating the property, the grantor or his attorney will draft a document that will state who the trustee and beneficiaries are as well as other relevant terms. The job of the trustee is to manage the donated property and to transfer the trust assets subject to the terms of the trust. The trustee is an agent, and must manage the property in the interest of the beneficiaries. The beneficiaries are the people named in the trust agreement who receive the trust assets.

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Living Trust

A living trust is one that is created while the grantor is alive. The document that the grantor drafts for a living trust is called a trust agreement. Generally living trusts are revocable, which means that while the grantor is alive she can unilaterally change any of the terms of the trust that she wants. Many times a living trust will have the grantor also acting as a trustee or beneficiary. Living trusts can be irrevocable, preventing the grantor from unilaterally changing the trust’s terms. A chief advantage of a living trust is that its assets are exempt from probate. This means that when you die, the other beneficiaries to your living trust will have immediate access to the property. Under probate, the transfer of your assets to your beneficiaries can take quite a while. However, even if you are a beneficiary and trustee of the trust, you may have limited access to the assets in the trust.

Testamentary Trust

A testamentary trust is one that is created after you die. Your will acts as a trust agreement and defines the terms of the trust, including who is to act as the trustee and who the beneficiaries are. You can change the terms of your testamentary trust at any time during you lifetime. Once you die, the terms of the trust cannot be changed. Assets in a testamentary trust are included in the probate estate, so it may take some time for your beneficiaries to gain access to the assets. Also, since probate hearings are public, all the property that will be included in the testamentary trust will be a matter of public record. However, the benefit of a testamentary trust is that you will be able to use those assets without restriction for the rest of your life.

Pour-Over Will

A pour-over will is a hybrid of a living and testamentary trust. To create a pour-over, you start by creating a living trust. This will require you to transfer some assets to the trust and identify a trustee and beneficiaries. Next, you draft a valid will making any specific gifts to people you want. Then, state in the will that any property that is left over from the specific gifts are to be transferred to the trust and distributed subject to its terms. This way you have one trust for all of your property but you do not have to transfer it all at once while you are still alive. Please note that the property that is transferred into the trust through your will still has to go through probate.

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Inheritances and Family Trusts

References

Related articles

Taxes & the Advantages of Living Trusts

A living trust is a document that a person creates while he is still alive, which enables him to financially provide for the beneficiaries he names. The creator of the trust, or grantor, takes some of his property and gives it to a third party, known as a trustee. The trustee, a person chosen by the grantor, manages the property and distributes it to the beneficiaries, subject to terms outlined in the document that established the trust known as a trust agreement. A trust, if structured appropriately, can protect assets from creditors and can allow for assets to be transferred quickly without having to go through probate. What effect the trust will have on taxes depends on how the trust is structured.

A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

How to Set Up a Joint Revocable Trust

A joint revocable trust is a type of living trust where you with your spouse, or you with another party, assign property to a trust to be distributed after you die under the guidance of a trustee. Spouses typically use joint revocable trusts to avoid probate and create a living trust for both spouses in a single document. As the name suggests, a revocable trust can be revoked by one of the creators at any time. Joint revocable trusts will have different requirements and advantages in every state and as such, it's advisable to contact an estate attorney or a document preparation service before setting up a joint revocable trust. If you do decide to create a joint revocable trust, the allotted assets in the trust will pass through your trust at your time of death rather than through your will. Prior to proceeding, you will need to familiarize yourself with some terminology associated with trust funds. The person creating the trust is known as the grantor or trustor, while a trustee is the organization or individual in charge of administering the trust. A beneficiary is the individual who will receive the proceeds of the trust, while residuary refers to any property remaining in the trust after the beneficiary has received the benefits of the trust.

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