Trusts are commonly used in estate planning and come in different flavors. The most common trusts are revocable and irrevocable – as well as whether the legal agreement is a living or testamentary trust. Understanding these concepts pay a key role in your estate plan.
A revocable trust is exactly what the name implies – it can be amended or revoked by the grantor (also known as settlor or trustor) after it’s been created. This type of trust becomes irrevocable upon the grantor’s death (because the grantor is no longer able to change or revoke the trust).
Irrevocable trusts, like revocable trusts, are exactly what the name implies – they cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary(s). The reason is the grantor effectively transfers their ownership of an asset into the trust which removes their rights of ownership.
Irrevocable trusts are less common than revocable trusts and are commonly used to minimize estate taxes, gain access to government benefits (Medicaid), and protect the assets in the trust.
Living Trusts (Inter Vivos Trusts)
A living trust is a trust created during the grantor’s life. A revocable trust and a living trust are separate terms that describe the same concept. The assets in a properly funded living or revocable trust will avoid probate and the costs associate with the probate process.
A testamentary trust is created by a grantor’s will and is not established until after they pass away. With this trust, the grantor can change beneficiaries and instructions during their lifetime, like a living trust. The major difference between a living trust and a testamentary trust is that testamentary trust assets do not avoid probate. The probate process is necessary to move assets into the beneficiary’s name, which can take months and be costly.
Generally, an individual will create a testamentary trust versus a living trust simply because it’s cheaper – though the additional costs of probating the assets may be more than the cost of creating a living trust during the grantor’s life.
Each trust could effectively meet your needs. However, understanding the nuances of each is crucial. An estate planning attorney can help guide you towards the most appropriate option by explaining the pros and cons of each trust before developing your estate plan.