What Is the Difference Between a Testamentary and a Living Trust?
The basic difference between a testamentary trust and a living trust is really just what it sounds like: A testamentary trust is provided for in a last will and testament, while a living trust is set up during the creator's lifetime. A testamentary trust is sometimes called a "will trust," or a "trust under will."
The decedent's will tells the executor of the estate to create a testamentary trust and under what terms. Although the will is written while the decedent is alive, the trust itself doesn't come into existence until the will has been probated and the executor settles the estate. This can't happen until their death so the trust, therefore, isn't "living."
A testamentary trust can be a good estate-planning tool if you're concerned with providing for one or more beneficiaries for an extended time, such as minor children, someone with special needs...or even someone who is just not very responsible with money so you don't want them to receive a windfall all at once.
Assets and money devoted to these individuals would initially go into your probate estate. Your named executor would then move it to the testamentary trust with rules set by you in your last will and testament.
Maybe the trust will hold the assets until a minor child reaches adulthood or achieves some other lifetime event like marriage or graduation from college. This sort of arrangement is often referred to as a "child's trust."
The named trustee can mete out distributions from a testamentary trust to avoid problems in cases where receiving assets and property all at once would disqualify beneficiaries who rely on government assistance. Apportioning distributions would also prevent spendthrift heirs from tearing through their inheritances in short order.
In any case, the trustee should be someone you trust to handle these details long-term.
Revocable Living Trusts
There are almost as many types of living trusts, also known as "inter vivos" trusts, as there are reasons to create them, but they all fall into one of two categories: They're either revocable or irrevocable.
A revocable living trust is one where its creator—referred to as the "grantor"—can dissolve it at any time. Grantors can add beneficiaries, delete beneficiaries, and buy and sell assets from the trust. A grantor typically acts as the trustee of the revocable trust, managing the assets it holds.
A revocable trust automatically becomes irrevocable when its grantor dies because they're no longer alive and available to amend it or dissolve it.
A testamentary trust is revocable during the testator's lifetime because it doesn't actually exist yet. It won't come into being until after death. The grantor reserves the right to tear up their old will and make a new one at any time while they're alive, so the testamentary trust it provides for can be undone as well.
The trust becomes irrevocable when the grantor dies and is no longer able to change the terms of the will.
Irrevocable Living Trusts
An irrevocable living trust is just the opposite. The grantor relinquishes all control over the trust after it's created and funded with property and/or money. This can be preferable for tax purposes and other reasons.
The grantor cannot legally act as trustee of an irrevocable trust, and can never take their property or money back unless they've named themselves as a beneficiary and set terms for distributions to themselves.
Of course, nothing about estate planning is that simple. A testamentary trust doesn't necessarily have to be established by the terms of your last will and testament. Maybe you don't have a will—you have a living trust instead. You can direct that your living trust should create a testamentary trust, too.
You could effectively have both types of trusts if the terms of your living trust's formation documents say that yet another trust is to be formed from the assets it holds when you die.
Your last will and testament can provide for more than one testamentary trust. You might want to set up different separate trusts for individual beneficiaries.
Trusts and Probate
Living trusts—both revocable and irrevocable—avoid probate of the property they hold because the trust entity, not the decedent, technically owns that property and the trust hasn't died. Probate is only necessary to move ownership from the name of a deceased individual to living beneficiaries, and a trust will do this without court involvement.
A testamentary trust can't avoid probate, however, because the property to be transferred into it remains in the decedent's name at the time of death—the trust hasn't been formed and funded yet. Probate is necessary to move that property into the name of the trust, just as it would be to transfer it into the names of living beneficiaries.