Living or Testamentary Trust

Once you have an understanding of the trust basics and the types of trusts available, you have many choices to consider. Besides revocability, you'll need to consider the timing of the transfer and the associated implications.

A living trust (sometimes called an inter vivos trust) is one created by the grantor during his or her lifetime, while a testamentary trust is a trust created by the grantor's will.

Only a funded living trust avoids probate court. In a testamentary trust, property must pass into the trust by way of the will and, thus, must go through the probate court process. Similarly, an unfunded living trust technically does not exist until it receives some assets. If you attempt to create a living trust but do not transfer any assets to it except through your will, the property must go through probate just like a testamentary trust.

Avoiding probate court, and the costs and delays associated with this process, is a distinct advantage of the living trust. On the other hand, funding of the living trust means that the grantor must transfer assets into the trust during his or her lifetime, and provide for management of those assets by a trustee. This creates its own burdens.

These burdens can be lessened when the grantor also acts as the trustee. However, in some instances, this can cause the trust's assets to be included in the grantor's taxable estate and may have income tax consequences. In many cases, an estate planning attorney can structure the trust to prevent distasteful outcomes.