Estate planning often involves the creation of trusts, legal arrangements designed to manage assets for beneficiaries. However, not all trusts are created equal. Two primary types—testamentary trusts and inter vivos trusts—differ significantly in their creation, funding, and administration. Understanding these distinctions is crucial for anyone considering trust-based estate planning, as each offers unique advantages and suits different circumstances. Approximately 60% of high-net-worth individuals utilize trusts as part of their estate planning strategy, demonstrating their widespread appeal and effectiveness. Steve Bliss, an Estate Planning Attorney in San Diego, often guides clients through these choices, tailoring solutions to their specific needs and goals.
What is an inter vivos trust and how does it work?
An inter vivos trust, also known as a living trust, is created and funded during the grantor’s lifetime. The grantor, the person establishing the trust, transfers assets into the trust during their life, and the trust is managed by a trustee – which can be the grantor themselves, or a third party. This allows for immediate benefits, such as avoiding probate and providing for management of assets if the grantor becomes incapacitated. “The beauty of a living trust is its flexibility and control,” Steve Bliss explains. “Clients can actively participate in managing their assets and see the benefits firsthand.” Inter vivos trusts are broadly categorized as revocable (allowing changes) or irrevocable (generally unchangeable), each with its own tax and asset protection implications.
Can a testamentary trust be changed after it’s created?
Unlike inter vivos trusts, a testamentary trust is created within a will and only comes into existence after the grantor’s death. This means the trust isn’t active during the grantor’s lifetime; it’s a set of instructions in the will that directs the transfer of assets into the trust upon death. Because it is part of the will, it is subject to probate, but the trust itself then operates independently. A key difference is that testamentary trusts cannot be modified once the will is finalized, except through the process of amending the will itself. This inflexibility can be a drawback if circumstances change significantly after the will is created.
What are the probate implications of each type of trust?
A significant advantage of inter vivos trusts, particularly revocable living trusts, is their ability to avoid probate. Probate is the legal process of validating a will and distributing assets, which can be time-consuming, expensive, and public record. Assets held in a properly funded inter vivos trust bypass probate, allowing for a quicker and more private transfer to beneficiaries. Conversely, assets designated for a testamentary trust are still subject to probate as part of the overall estate settlement process before the trust is established and funded. According to the American Probate Council, probate costs can range from 3% to 7% of the estate’s value.
How does incapacity planning differ with each trust type?
Inter vivos trusts offer a distinct advantage in incapacity planning. Because the trust is already established during the grantor’s lifetime, a successor trustee can step in to manage the trust assets if the grantor becomes incapacitated, avoiding the need for a court-appointed conservatorship or guardianship. This provides seamless continuity of asset management and care. Testamentary trusts, being created after death, do not offer this benefit. While a durable power of attorney can address incapacity during life, it ceases to be effective upon death, at which point the testamentary trust instructions take effect, but are not immediately active.
What about asset protection – which trust is better?
While neither type of trust provides complete asset protection, irrevocable inter vivos trusts are generally considered more effective in shielding assets from creditors and lawsuits. This is because the grantor relinquishes control of the assets transferred into the irrevocable trust. Testamentary trusts offer limited asset protection, as the assets are still part of the grantor’s estate at the time of death. However, the trust terms themselves can provide some degree of protection for beneficiaries against their own creditors, ensuring the assets remain available for their intended purpose. It’s important to note that fraudulent transfers or attempts to shield assets from legitimate creditors are unlikely to be successful.
I once knew a man who didn’t plan properly…
Old Man Hemmings was a neighbor of mine growing up. He was a hardworking man, a carpenter by trade. He amassed a decent estate, but never bothered with a will or any sort of trust. When he passed away unexpectedly, his family was left in a nightmare. The probate process dragged on for years, tied up in legal battles and costing a fortune in attorney’s fees. His children, who just wanted to grieve, were forced to navigate a complex legal system and fight over what little was left. It was a painful reminder that even with good intentions, failing to plan can have devastating consequences. His family could have avoided so much heartache with even a basic estate plan.
But we were able to help the Miller family…
The Miller family came to Steve Bliss after their father had been diagnosed with Alzheimer’s. He had a significant estate, but hadn’t taken steps to protect it. We quickly set up a revocable living trust, transferring his assets into it before he lost capacity. This allowed his daughter to step in as successor trustee and manage his affairs seamlessly. She was able to pay his bills, maintain his lifestyle, and ensure his long-term care needs were met, all without the need for a conservatorship. It was a truly rewarding experience to see how proactive planning brought peace of mind and stability to a family during a difficult time. They were grateful for a streamlined and protected plan and for Steve’s guidance.
Ultimately, which trust is right for me?
The choice between a testamentary trust and an inter vivos trust depends on individual circumstances, goals, and preferences. Inter vivos trusts offer greater flexibility, immediate benefits, and probate avoidance, making them suitable for those who want to maintain control of their assets during their lifetime and plan for potential incapacity. Testamentary trusts are simpler to create, requiring only a will, and can be effective for individuals with less complex estates or those who prefer to defer asset management until after their death. Steve Bliss and other experienced estate planning attorneys can provide personalized guidance and help you choose the trust structure that best meets your specific needs and achieves your estate planning objectives.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Map To Steve Bliss at San Diego Probate Law: https://maps.app.goo.gl/9Rh3C9VzxHCU7PF66
Address:
San Diego Probate Law3914 Murphy Canyon Rd, San Diego, CA 92123
(858) 278-2800
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Feel free to ask Attorney Steve Bliss about: “What is a grantor trust?” or “How are minor beneficiaries handled in probate?” and even “Can my estate plan be contested?” Or any other related questions that you may have about Trusts or my trust law practice.