Estate planning is a critical process that ensures your assets are managed and distributed according to your wishes. Among the various tools available, revocable trusts and testamentary trusts are popular choices. While both serve essential functions, their applicability depends on individual circumstances. For two-parent households where both parents are healthy, testamentary trusts often present a more practical and cost-effective option. Let's explore when it makes sense to use a revocable trust versus a testamentary trust, with arguments each way.
Revocable Trusts
What is a Revocable Trust?
A revocable trust, also known as a living trust, is created during the grantor's lifetime and can be altered or revoked as circumstances change. The grantor retains control over the assets in the trust and typically serves as the trustee, managing the trust's assets.
Pros of a Revocable Trust
Avoids Probate: Assets held in a revocable trust do not go through probate, which can save time and reduce costs associated with court proceedings.
Privacy: Since the trust does not go through probate, its contents remain private, unlike a will, which becomes a public record.
Flexibility: The grantor can modify or revoke the trust at any time, making it adaptable to changing circumstances.
Incapacity Planning: If the grantor becomes incapacitated, the successor trustee can manage the trust assets without court intervention.
Cons of a Revocable Trust
Cost: Establishing a revocable trust can be more expensive upfront due to legal fees and the complexity of transferring assets into the trust.
Maintenance: Regular updates and management are required to ensure that all assets are properly transferred and the trust remains current.
No Tax Benefits: Unlike irrevocable trusts, revocable trusts offer no significant tax advantages.
When to Use a Revocable Trust
Complex Estates: If you have a large or complicated estate with diverse assets, a revocable trust can help manage these efficiently.
Privacy Concerns: If you prefer to keep your estate details private, a revocable trust can help achieve that.
Incapacity Planning: If there is a concern about potential incapacity, a revocable trust ensures that your assets are managed according to your wishes.
Testamentary Trusts
What is a Testamentary Trust?
A testamentary trust is created through a will and only takes effect upon the grantor's death. This type of trust is outlined in the will, specifying how the assets will be managed and distributed to beneficiaries.
Pros of a Testamentary Trust
Cost-Effective: Testamentary trusts are generally less expensive to establish since they are part of the will, requiring no additional documentation or funding during the grantor's lifetime.
Simplicity: There is no need to transfer assets into the trust while the grantor is alive, simplifying the estate planning process.
Posthumous Control: The grantor can set specific terms for the distribution of assets, such as age restrictions for beneficiaries.
Cons of a Testamentary Trust
Probate: Assets in a testamentary trust must go through probate, which can be time-consuming and potentially costly.
Lack of Privacy: Since the will goes through probate, the details of the testamentary trust become part of the public record.
Incapacity Planning: Testamentary trusts do not offer benefits for managing assets during the grantor's lifetime in case of incapacity.
When to Use a Testamentary Trust
Two-Parent Households: For healthy parents, the simplicity and cost-effectiveness of testamentary trusts make them an attractive option.
Small to Medium Estates: If your estate is not overly complex, a testamentary trust can efficiently manage and distribute your assets.
Young Families: Testamentary trusts can be ideal for young families who want to ensure their children's financial security without the immediate costs and complexities of a revocable trust.
Conclusion
While both revocable trusts and testamentary trusts have their merits, the decision often hinges on your specific needs and circumstances. For two-parent households where both parents are healthy, a testamentary trust often provides a simpler, more cost-effective solution for ensuring your family's future security. It allows you to manage and distribute your assets according to your wishes without the upfront costs and ongoing maintenance required by a revocable trust.
Ultimately, consulting with an estate planning attorney can help tailor a plan that best suits your family's needs, ensuring peace of mind for you and a secure future for your loved ones.
Disclaimer
The information provided on this blog is for general informational purposes only and is not intended as legal advice. Readers should not act upon this information without seeking professional counsel from an attorney licensed in their jurisdiction. Ari Weisbard is a member of the DC and NY bars and is not licensed to practice law in any other state. Consult with a qualified attorney to obtain advice tailored to your specific legal situation.