When I discuss estate planning with families, the word “trust” often creates more questions than answers. Two terms that are frequently confused are living trust and testamentary trust. Both can be used to manage and distribute property, but they are created differently, become effective at different times, and can have very different consequences for probate and incapacity planning.
Understanding the distinction can help you decide which type of trust may be appropriate for your family.
What Is a Living Trust?
A living trust, sometimes called an inter vivos trust, is created during your lifetime. One of the most common estate planning tools used in Florida is a revocable living trust.
With a revocable living trust, you generally create the trust, transfer appropriate assets into it, and may serve as your own trustee while you are alive and capable. You can typically amend or revoke the trust during your lifetime.
One of the primary benefits of a living trust is that it can provide continuity if you become incapacitated. A properly designated successor trustee may be able to step in and manage trust assets without requiring a court-supervised guardianship over those particular assets.
A properly funded living trust can also help avoid probate. If real estate, financial accounts, or other appropriate assets are legally owned by the trust at the time of your death, the successor trustee can generally administer those assets according to the terms of the trust without first transferring them through a probate estate.
The key phrase, however, is properly funded. Creating a trust does not automatically transfer your assets into it.
What Is a Testamentary Trust?
A testamentary trust is created through a last will and testament. Unlike a living trust, it does not operate during your lifetime.
Instead, the trust comes into existence after your death, typically as part of the probate administration of your estate.
For example, a parent might state in a will that a child's inheritance should be held in trust until the child reaches age 30. When the parent dies, the will is admitted to probate, estate assets are administered, and the designated assets are eventually transferred to the trustee of the testamentary trust.
The trustee then manages and distributes those assets according to the instructions contained in the will.
The Biggest Difference Is Timing
The easiest way to understand the difference is to focus on when each trust becomes operative.
A living trust exists during your lifetime.
A testamentary trust is created after your death through your will.
That timing distinction affects several important planning issues.
A living trust can potentially help with management of your assets if you become incapacitated. A testamentary trust cannot provide lifetime incapacity planning because it does not yet exist.
Similarly, assets properly transferred into a living trust may avoid probate. Assets that fund a testamentary trust generally pass through probate first because the trust is created through the will.
Why Would Someone Use a Testamentary Trust?
A testamentary trust can still be an effective estate planning tool even though it does not avoid probate.
However, it is commonly used for Medicaid Planning as spouses can only create Special Needs Trust for medicaid planning through a testamentary Trust.
A misconception is that it is useful when you want to leave property for:
- Minor children
- Young adult beneficiaries
- Beneficiaries who may not be ready to manage a large inheritance
- Family members with creditor or financial concerns
- Beneficiaries who should receive money gradually rather than all at once
But, all of this can be accomplished in a Revocable Living Trust.
Is a Living Trust Better Than a Testamentary Trust?
It is not a one size fits all and it really depends on the clients needs.
A living trust may offer greater flexibility during your lifetime, assist with incapacity planning, and help avoid probate when properly funded. However, it requires attention after the documents are signed. New assets may need to be transferred into the trust, beneficiary designations should be coordinated, and the plan should be reviewed as circumstances change.
A testamentary trust may require less administration during your lifetime, but probate is generally part of the process because the trust is created under your will after death.
The right choice depends on your goals, family structure, assets, real estate ownership, beneficiaries, and concerns about incapacity.
In some estate plans, both types of trusts may play a role.
Choosing the Right Trust for Your Family
At Gold Legacy Law, PLLC, I focus my practice on estate planning, probate, trust and estate administration, guardianship, and asset protection. As a Miami native with more than twelve years of legal experience, I have seen how planning decisions made today can significantly affect families later.
My work in probate and trust administration also gives me a practical perspective on how estate plans function after someone dies. The goal is not simply to create documents that sound sophisticated. The goal is to create a plan that actually works when your family needs it.
If you are considering a living trust, a testamentary trust, or another strategy for protecting and distributing your assets, a Miami Lakes Florida trust attorney can help you evaluate the options and develop a plan tailored to your family and long-term goals.
Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship between you and Gold Legacy Law. For legal advice regarding your personal situation, please contact our office to schedule a consultation.
