Testamentary Trusts Vs. Living Trusts
A testamentary trust is a trust created in a will, unlike living trusts that are created while you are alive. Living trusts can be revocable, meaning you can cancel the trust and take your property back, or irrevocable, but both allow you to put property into the trust while you are alive. This is often called “funding” the trust. Testamentary trusts, however, are not created until your death, so it is not possible for you to transfer your assets into a testamentary trust during your lifetime. All of the assets used to fund your testamentary trust are placed into that trust after your death.
Trusts in Probate
Legally, living trusts don’t die when you do, so assets placed in a living trust during your lifetime do not have to go through probate. The living trust continues to own those assets, although they are held for someone else’s benefit after you die. However, assets not already in a trust at the time of your death may have to go through probate. For example, if you are the sole owner of a vehicle or piece of real estate at the time of your death, the vehicle or land may have to go through probate before anyone else can own it, even if the “person” receiving it is a trust.
Creating a Testamentary Trust
Since your testamentary trust is created and funded by the language of your will, a probate court must make a determination that your will is valid before the trust can be created. Generally, courts do this at the beginning of the probate process. The court next appoints an executor to manage your estate, typically the person you named to perform that duty in your will. Since your will creates the trust, your executor has the responsibility of establishing the trust according to the terms of your will. Your executor is responsible for distributing your assets once he pays your creditors, but he cannot distribute assets to a trust until he creates that trust during probate.
Disadvantages of Testamentary Trusts
Since trusts are formal legal structures, they cannot be started without legal paperwork. Even though the trust is developed by your will, the trust causes additional paperwork, responsibility and expense for your executor and estate. The person in charge of your trust, the trustee, can be your executor or someone else. Depending on state law, the trustee may be required to make periodic reports to the court regarding the status of the trust for as long as the trust exists.