As a layperson, there is no reason why you would understand the various tools that are in the estate planning toolkit. Many people are surprised to hear that there are multiple different types of trusts that satisfy various respective aims.
In this post, we are going to look at two of the most commonly used trusts, and we will highlight the major difference between them.
It is logical to think of trust vs. will as an either/or proposition, but this is not really accurate. You could have a trust and a will, and this can be the right course of action, but that’s a subject for another blog post.
In addition to the two documents complementing one another, it is possible to have a trust that is contained within a will. This is the short definition of a testamentary trust.
Let’s say that you are the parent of a dependent daughter, and you want to be sure that your child will be provided for if you pass away while she is still a minor. You have a life insurance policy because you want the proceeds to be used to support your child if something happens to you.
Under these circumstances, you could establish a testamentary trust and make the trust the beneficiary of the life insurance policy. The executor that you name in the will would follow your instructions and create the trust after your passing.
It would be possible for the executor to act as the trustee if this is your choice, but you could name someone else to administer the trust on behalf of your child.
This is the most common reason why people use testamentary trusts, and this type of trust could also be used to provide assistance to someone that is relying on need-based government benefits.
Revocable Living Trust
As the name would indicate, a living trust is active while you are still alive, and this is the fundamental difference. You would act as the trustee throughout your life, so you would have complete access to the resources in the trust.
When you create the trust agreement, you would name a successor trustee to assume the role after your passing. This can be someone that you know personally, or it can be a professional fiduciary like a trust company or the trust department of a bank.
Of course, your heirs would be the beneficiaries of the trust. Along the way, if you want to change the trustee or beneficiary designations or adjust the terms, you are free to do so. You would also be able to convey additional property into the trust at any time.
A spendthrift provision could be included to protect the principal from the beneficiary’s creditors. You would be able to dictate the terms of the distributions, so you could instruct the trustee to distribute limited assets on an incremental basis.
A well-constructed estate plan will address possible incapacity, because a significant percentage of elders become unable to handle their affairs at some point in time.
When you have a living trust, you can name a disability trustee to assume the role if it ever becomes necessary. This can be the same individual or entity that will act as the successor trustee, but this is not a requirement.
After your death, the trustee would distribute assets to the beneficiaries in accordance with your wishes outside of probate. This is a costly and time-consuming legal process that would be part of the equation if you state your final wishes in a simple will.
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As you can see, there are different estate planning approaches that can be taken, and the right choice will depend on the circumstances.
We can gain an understanding of your situation and explain your options so you can make informed decisions. At the end of the process, you will walk away with a custom crafted plan that ideally suits your needs.
You can set up an appointment at our Manhattan, NY estate planning office if you give us a call at 212-973-0100. There is also a contact form on this site you can use to send us a message, and if you reach out electronically, you can expect to receive a swift response.