Making a will is one of the most important steps that you can take in order to protect your family and loved ones. When it comes to estate planning, there are two main types of trusts: inter vivos trusts and testamentary trusts.
In this personal finance guide, we will compare and contrast these two options, so that you can make an informed decision about which type of trust is right for you.
Inter Vivos Trust Vs Testamentary Trust Table of Contents
What is an Inter Vivos Trust?
An Inter Vivos Trust, also known as a Living Trust, is a trust created during the lifetime of the settlor. The settlor is the person who creates and funds the trust. The trustee is the person who manages the trust property. The beneficiaries are the people who benefit from the trust.
What is a Testamentary Trust?
A Testamentary Trust is a type of trust that is created through a person's will. The trustee manages the assets in the trust according to the instructions set forth in the will. This type of trust does not go into effect until after the person dies.
What is The Difference Between an Inter Vivos Trust and a Testamentary Trust?
The main difference between an Inter Vivos Trust and a Testamentary Trust is the timing of when they are created. An Inter Vivos Trust is created during your lifetime, while a Testamentary Trust is not created until after your death.
What Are The Different Types of Inter Vivos Trust?
There are two types of Inter Vivos trusts:
A revocable trust can be changed or revoked by the settlor at any time.
An irrevocable trust cannot be changed or revoked once it is created.
What Are The Different Types of Testamentary Trust?
There are two types of testamentary trusts:
A revocable trust is a trust that can be modified or terminated by the settlor at any time.
An irrevocable trust is a trust that cannot be modified or terminated by the settlor. Once an irrevocable trust is created, it is set in stone.
What Are The Advantages of an Inter Vivos Trust?
An Inter Vivos trust, also known as a living trust, is created during the lifetime of the settlor. The main advantage of this type of trust is that it can help to avoid probate.
Probate is the legal process through which a will is proved to be valid and its instructions are carried out. A living trust can also help to protect your assets from creditors and lawsuits.
What Are The Advantages of a Testamentary Trust?
There are a few key advantages of setting up a testamentary trust, as opposed to an inter vivos trust. Firstly, by waiting until you die to set up the trust, your assets won't be subject to probate. This can save your beneficiaries both time and money.
Another advantage of a testamentary trust is that it can be used to protect your assets from creditors. If you set up an inter vivos trust, your creditors may be able to attack the trust and seize its assets.
However, if you set up a testamentary trust, your creditors will only be able to go after the assets that are held in the trust - they won't be able to touch your other assets.
Finally, a testamentary trust can be used to minimize estate taxes. If your estate is large enough, it may be subject to estate taxes when you die. However, if you set up a testamentary trust, your beneficiaries will only have to pay taxes on the income that they receive from the trust - not on the principal.
What Are The Disadvantages of Inter Vivos Trust?
The main disadvantage of an Inter Vivos trust is that it can be expensive to set up and maintain. You will need to pay the fees of the trustee, as well as any legal and accounting fees associated with setting up and administering the trust.
Additionally, if you later decide to change the terms of the trust, or revoke it entirely, you may need to pay additional fees.
Another potential downside of an Inter Vivos trust is that it can be complex to administer. The trustee will need to keep track of all the assets in the trust, as well as the income and expenses associated with them. This can be a lot of work, particularly if the trust holds a large number of assets.
Finally, an Inter Vivos trust can have negative tax consequences in some cases. For example, if the trust owns property that is subject to capital gains tax, the trustee will be responsible for paying that tax.
Similarly, if the trust generates income that is taxable, the trustee will need to pay taxes on that income.
What Are The Disadvantages of Testamentary Trust?
The main disadvantage of a testamentary trust is that it cannot be created until after the death of the person who creates it, which means that it cannot be used to manage assets during their lifetime.
This can be a problem if the person creating the trust has significant assets and wants to have control over how they are managed and distributed.
Another disadvantage is that testamentary trusts can be more expensive to set up and maintain than inter vivos trusts.
Finally, they can be more complicated to administer, which can make them less attractive to some people.
So, Which One Should You Use?
It really depends on your specific circumstances. If you want to create a trust during your lifetime, then an Inter Vivos Trust is probably the way to go. On the other hand, if you want your trust to come into effect after your death, then a Testamentary Trust is probably a better option.
What Are Some Alternatives to Using an Inter Vivos Trust or a Testamentary Trust?
Here are a few alternatives to using an Inter Vivos Trust or a Testamentary Trust:
- A will can be used to transfer property upon your death.
- A living trust can be created during your lifetime, but it must be revocable and you must maintain control over the assets in the trust.
- An irrevocable trust can be created during your lifetime, but it cannot be changed or revoked once it has been created.
- A charitable remainder trust can be used to provide income for yourself and/or your family while also benefiting a charity of your choice.
What Are Some Tips For Using an Inter Vivos Trust?
An Inter Vivos trust, also known as a living trust, is created during your lifetime. It can be revocable or irrevocable. A revocable trust gives you the ability to change the terms or revoke the trust entirely, while an irrevocable trust cannot be changed once it's been created.
Here are some tips for using an Inter Vivos trust:
Keep the trust updated. As your life circumstances change, you may need to make changes to your trust. Be sure to keep it up-to-date so that it reflects your current wishes.
Name a successor trustee. You should name a successor trustee in your trust documents in case you become incapacitated or pass away. This person will be responsible for managing the trust and carrying out your wishes.
Review the beneficiary designations. Be sure to review the beneficiary designations on your accounts periodically. You may need to make changes as your life circumstances change.
Fund the trust. Once you've created your trust, you'll need to transfer your assets into it. This is called funding the trust. Without funding, the trust will be unable to achieve its purpose.
What Are Some Tips For Using a Testamentary Trust?
If you are looking to use a Testamentary Trust, there are a few things you should keep in mind. First and foremost, you need to make sure that the assets you want to place in the trust are properly titled.
You also need to be clear about what your goals are for the trust, as this will dictate how it is structured. Finally, you need to work with an experienced attorney to ensure that the trust is properly created and funded.
If you follow these tips, you can be sure that your Testamentary Trust will be a valuable tool for protecting your assets and ensuring that they are distributed according to your wishes.