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Testamentary Trust vs. Living Trust: A Comparison



A trust can be an important estate planning tool especially where heirs are considered to be minors. In Connecticut, an individual is considered to be minor until their 18th birthday. And if a minor inherits more than $10,000 through probate, their inheritance is subject to probate court oversight through the appointment of a guardian (which can cost money). And often times parents do not want their young adult children to inherit their full inheritance until they are of an age in which the children should be responsible with money and other assets.


A revocable trust is a type of living trust.


Now how is a testamentary trust different from a living trust? Below I have compared and contrasted both by topic:

Time Established:

- A living trust is established during your lifetime. It goes into effect immediately upon execution.

- A testamentary trust is established when you pass away, through you will.


Revocable and Irrevocable:

- A living trust is revocable. It become irrevocable when the trustee passes away.

- A testamentary trust is irrevocable because it is established when you pass away. However, it can be modified if/when you modify your will. And you can modify your will as long as you have capacity to do so. You need less capacity to execute a will than to execute a contract.


Public vs. Private:

- A living trust is in essence a private document. I say "in essence" because only beneficiaries can have access to at least part of the trust's content.

- A testamentary trust is not a private document because it is established within your will and wills are public documents that can be assessed and viewed by anyone.


Assets:

- A living trust contains assets that you, the trustee, transfer into the trust during your lifetime or through a specific type of will. So it needs to be managed by the trustee. It also needs to be funded. If you do not have funds to add to your living trust during your lifetime, you can use the assets from your probated estate to fund your living trust by using a "pour over will" or by designating the trustee of your living trust as the beneficiary of your life insurance policy (typically after your spouse, so as the secondary beneficiary).

- A testamentary trust contains the assets that pass through your probated estate.

For both, you need to understand and be aware of what assets pass inside and outside of probate. And in turn, if an asset passes outside of probate, you need to understand how that happens- e.g., beneficiary designation? by operation of law (e.g. certain types of deeds)? So one needs to really talk through the specifics of how your current assets would pass when you pass away to make sure that they are going to the correct individual or entity when doing your estate planning. Everyone estate is different.

When Inheritance is Distributed:

- Assets already in a living trust do not go through probate, so there is no delay in accessing the assets in a living trust. That should include liquidating and distributing the assets (provided the trustee has the authority to do those things).

- Assets that are going into a testamentary trust are delayed because the trust is not created until after probate has been completed. In Connecticut it takes at least nine months to probate an estate. It can take longer if assets need to be liquidated, something is challenged, etc. No inheritances are distributed until probate is completed unless a probate court agrees to a distribution prior to probate being completed. So expenses can steadily accumulate (for example bills for a mortgage).

Creditors:

- An advantage with a living trust is that there can be provisions in it that are designed to protect your assets from creditors (but creditors can still try to challenge them). And assets in a living trust are not part of the probated estate.

- Any assets that pass through probate can be accessible to creditors. Typically, creditors have to make a claim within a defined period of time and there is a statutory priority list that defines which creditors are paid first. If there are insufficient probate assets to pay all of the creditors, then the estate is deemed to be insolvent and all of the creditors are not paid.

However, all assets that are owned when an individual passes (even those within a trust) are used to calculate the probate court fee and to determine whether an estate is a taxable estate by both the state and the federal government.

Probate Court Involvement:

- Overall a living trust is not subject to probate court oversight. The terms and conditions under which the trust are to function and be managed are defined within the terms of the trust. However, if there is an issue with, for example, administering the trust, then an action can be brought in probate court to address the issue.

- A testamentary trust is subject to probate court oversight. Although this can cost money and delay, having court oversight could be viewed by some to be in essence an "insurance" policy because the court would be involved to make sure that everything is being done properly for the benefit of the beneficiaries.

Both:

- Can include provisions for how you wish your assets to be managed and distributed after you pass away;

- Can have both spouses as trustees before another trustee is appointed after both spouses pass away;

- Both can allow your children not to inherit assets until they reach a certain age; stagger when they inherit; and to customize other provisions, as long as those provisions do not violate public policy (e.g., you cannot say that your child has to marry someone in particular in order for them to receive their inheritance);

- Give your trustee authority to do additional estate planning for your heirs should they be deemed to now be disabled;

- Can provide provisions for who should inherit next should a designated heir pass away before they can inherit something from your estate; and

- Both are overseen by the Connecticut Uniform Trust Code, which went into effect in 2020.

We hope that you found this information to be helpful. As you can imagine, everyone's family, assets and needs are different so this article should not considered to be legal advice, but rather a general overview. One size does not fit all.


We would be happy to meet with you to discuss your options and propose a customized estate plan that meets your current goals and objectives. We ask that clients fill out our estate planning questionnaire prior to the discussion/meeting to assist in assessing your particular situation.


We would also be happy to review your current estate planning documents to make sure that they still meet your goals and objectives.


You can reach the office at 860.295.1600 or through the contact page on this website.


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