“Estate planning offers tools to establish and maintain effective control over cash, investments and real estate assets during a person's lifetime and upon death. While wills and beneficiary designations work well to ensure that an estate plan meets the unique needs of the individual establishing the plan, each has its limits.”
Trusts can be part of your estate planning to transfer assets to your heirs. A trust created while an individual is still alive is an inter vivos trust, while one established upon the death of the individual is a testamentary trust.
Investopedia’s recent article entitled “Inter Vivos Trust vs. Testamentary Trust: What's the Difference?” explains that an inter vivos or living trust is drafted as either a revocable or irrevocable living trust and allows the individual for whom the document was established to access assets like money, investments and real estate property named in the title of the trust. Living trusts that are revocable have more flexibility than those that are irrevocable. However, assets titled in or made payable to both types of living trusts bypass the probate process, once the trust owner dies.
With an inter vivos trust, the assets are titled in the name of the trust by the owner and are used or spent down by him or her, while they’re alive. When the trust owner passes away, the remainder beneficiaries are granted access to the assets, which are then managed by a successor trustee.
A testamentary trust (or will trust) is created when a person dies, and the trust is set out in their last will and testament. Because the creation of a testamentary trust doesn’t occur until death, it’s irrevocable. The trust is a created by provisions in the will that instruct the executor of the estate to create the trust. After death, the will must go through probate to determine its authenticity before the testamentary trust can be created. After the trust is created, the executor follows the directions in the will to transfer property into the trust.
This type of trust doesn’t protect a person's assets from the probate process. As a result, distribution of cash, investments, real estate, or other property may not conform to the trust owner's specific desires. A testamentary trust is designed to accomplish specific planning goals like the following:
- Preserving property for children from a previous marriage
- Protecting a spouse's financial future by giving them lifetime income
- Leaving funds for a special needs beneficiary
- Keeping minors from inheriting property outright at age 18 or 21
- Skipping your surviving spouse as a beneficiary and
- Making gifts to charities.
Through trust planning, married couples may use of their opportunity for estate tax reduction through the Unified Federal Estate and Gift Tax Exemption. That’s the maximum amount of assets the IRS allows you to transfer tax-free during life or at death. It can be a substantial part of the estate, making this a very good choice for financial planning.
Reference: Investopedia (Aug. 30, 2019) “Inter Vivos Trust vs. Testamentary Trust: What's the Difference?”