A well rounded and comprehensive estate plan will typically include a number of different strategies and tools beyond a basic Last Will and Testament. One of the most popular additions to a comprehensive estate plan is a trust. Although all trusts begin with the same basic components, after that you will find that trusts can be very different in both structure and purpose. If you are considering the addition of a trust to your estate plan, one of the first decisions you will need to make is whether you need a testamentary trust or a living trust. To decide if a testamentary trust is best, you will need to have a firm understanding of the difference between the two types of trusts.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Trustor, also referred to as a “Settlor”, “Maker” or “Grantor,” who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A beneficiary can be an individual, a corporation, a charity, or even the family pet. You can also have both current and future beneficiaries in your trust. All trusts include the same five elements:
- Trust terms
Trust Categories – Testamentary vs. Living
All trusts are first divided into two broad categories – testamentary and living trusts. A testamentary trust is a trust that is created at any time during the Trustor’s lifetime; however, it does not activate until the death of the trustor. A testamentary trust is usually triggered by a term in the Trustor’s Last Will and Testament. A living trust, on the other hand, can also be created at any time during the Trustor’s lifetime but activates upon completion of all the steps necessary to create the trust agreement.
Common Use for a Living Trust
As is the case with all decisions you make in your estate plan, it is in your best interest to consult with your North Dakota and Minnesota estate planning attorney before deciding what type of trust you need for your intended purpose. Educating yourself, however, is always a good idea. With that in mind, the following are some common reasons why people choose to use a living trust in their estate plan instead of a testamentary trust:
- Privacy – upon your death, your estate will likely be required to go through the legal process known as probate. During probate, your estate assets are identified, located and valued. Creditors of the estate are notified and offered the opportunity to file claims against the estate before the remaining estate assets are eventually passed down to beneficiaries and/or heirs of the estate. All documents filed with the probate court are available to the public, including the decedent’s Last Will and Testament. If you prefer to keep your estate details out of the public eye, one way to do that is through he use of a living trust because assets held are considered non-probate assets. Consequently, the details of your living trust will remain private.
- Avoid Living Probate – if you become incapacitated your family must petition the court for permission to act on your behalf. However, if you place assets into your trust, the Successor Trustee may act in accordance with the trust’s directions, and ultimately your wishes, without the need to petition the court.
- Asset Protection – assets placed in a living trust may be shielded from creditors. In the event of a lawsuit any assets you own outright may be seized. Placing assets into a living trust may protect you from liability.
As you can see, there are a number of reasons why a testamentary trust might be preferable to a living trust. Be sure to consult with your estate planning attorney to decide if a testamentary trust will be a beneficial addition to your estate plan.
For more information, please join us for an upcoming FREE seminar. If you have additional questions about a testamentary trust, contact the experienced North Dakota estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.