Do I Need a Testamentary Trust and a Revocable Living Trust?

Trust agreements are useful and flexible estate planning tools that serve many purposes. In addition to avoiding probate for some assets, trusts can protect assets from creditors, reduce estate taxes, and prevent property from being transferred to non-family members. In this blog, our Michigan estate planning attorney discusses the need for a testamentary trust versus a revocable living trust.  Both types of trusts may be necessary because each trust has slightly different elements that could be beneficial for the grantor and the trust beneficiaries.

What is a Testamentary Trust?

A testamentary trust is created through your will. Therefore, it does not become effective until your death. With a testamentary trust, you can bequeath property to minors, persons with special needs, charities, and other individuals. Even though most testamentary trusts are created to hold the inheritance of a minor, you can use a testamentary trust for the benefit of any other party.

A trustee is appointed to manage the trust assets, according to the terms included in the testamentary trust. A testamentary trust for a minor or a person with special needs typically allows the trustee broad discretion to use the funds for the “education, upkeep, and maintenance” of the beneficiary. In the case of a minor, parents specify at what age the trust ends, and the property is transferred to the child.

A parent may allow a portion of the inheritance to be distributed to the child when the child turns 21 or graduates from college with the remaining assets being held in trust until the child is older. The terms of a testamentary trust are flexible, which makes these types of trusts perfect for parents who want to protect a child’s inheritance. Testamentary trusts are also extremely easy to establish as part of your will.

What is a Revocable Living Trust?

A revocable living trust becomes effective during your lifetime when you execute the trust agreement and fund the trust.  Funding the trust requires you to transfer assets from your personal name into the trust. The trust owns the assets. A trustee manages the assets according to the terms of the trust for the benefit of the trust’s beneficiaries.

With a revocable living trust, you can continue to maintain control over the assets during your lifetime by appointing yourself as the trustee. The terms of the trust may also be modified, and you can revoke the trust at any time before your death or incapacitation. Upon your death or incapacitation, the trust becomes an irrevocable trust managed by the successor trustee designated by you in the trust agreement.

Why Do I Need a Testamentary Trust and a Revocable Living Trust?

A revocable living trust protects assets from creditors and avoids probate. Therefore, it may be best to use a revocable living trust to provide for minors and other heirs instead of tying up the property in probate with a testamentary trust. However, there are some reasons why you would still need a testamentary trust, especially if you have minor children or heirs with special needs.

Some property cannot be held by a trust, and you may not want certain property in the trust’s name. Therefore, you need to ensure that a testamentary trust protects any property not held by the trust. Furthermore, you are likely to acquire assets after you create the original trust agreement.  Unless you transfer all property to the trust, you still need a testamentary trust to handle this property after your death. In certain circumstances, you may want the probate court to oversee the management of the trust to ensure the best interests of the beneficiaries are protected. A revocable living trust is not subject to the probate court’s jurisdiction without the necessity of litigation.

Depending on your situation, there could be other advantages and benefits of having both types of trust agreements in your estate plan. A Michigan estate planning attorney can evaluate your situation, goals, and needs to determine the estate documents you need to protect your family and your assets.

Contact The Elder Care Firm of Christopher J. Berry, CELA for More Information

Estate planning provides the peace of mind of knowing your loved ones will have the financial means to take care of themselves after your death. Failing to have an estate plan in place can cause undue financial hardships for your family, in addition to added stress and anxiety.

To discuss estate planning options with an experienced Michigan probate lawyer, call 888-390-4360 or use the contact form on our website to schedule an appointment with one of our attorneys.

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