When planning your estate, selecting the right type of trust is essential for fulfilling your wishes distributing your assets according to your desires. Two common types of trusts are testamentary trusts and revocable living trusts. While both serve the purpose of managing and distributing assets, they have distinct differences in terms of creation, administration, and functionality. Understanding these differences can help you make an informed decision best suiting your estate planning needs.

Testamentary Trusts

A testamentary trust is created within a will. It takes effect upon the death of the testator (the person creating the will). The will and the trust are one document.

Key Characteristics:

1. Creation and Activation: A testamentary trust is created as part of the will and only becomes active after the testator’s death and by filing the appropriate documents with the court.
2. Probate Process: Because it is part of the will, a testamentary trust must go through probate. In Colorado, an informal probate process is available. This process streamlines the proceedings, reducing the length of time required and minimizing court supervision. The informal probate process saves time and money.
3. Control and Flexibility: The testator retains complete control over the assets and can make changes to the will, including the trust provisions, until their death. However, once the testator passes away, the trust terms become irrevocable.
4. Funding: Since, assets are not transferred into the trust until after the testator’s death; funding can occurs through the use of beneficiary designations, and if necessary through the will as well.

Revocable Living Trusts

A revocable living trust, also known as a living trust, is established during the lifetime of the grantor (the person creating the trust). A living trust may be altered or revoked at any time while the grantor is alive. This type of trust manages the grantor’s assets both during their life and after their death, often allowing for a smooth transition of asset distribution.

Key Characteristics:

1. Creation and Activation: A revocable living trust is created and becomes effective during the grantor’s lifetime. The grantor typically acts as the trustee, managing the trust assets.
2. Assets Bypass Probate: A primary benefit of a revocable living trust is; assets placed in the trust will bypass probate. Upon the grantor’s death, the assets are distributed according to the trust terms. Depending on your circumstances this may save time and reduce legal expenses.
3. Control and Flexibility: The grantor can amend or revoke the trust at any time. This allows for adjustments in response to changing circumstances. Once the grantor dies, the trust terms become irrevocable.
4. Funding: To be effective, a revocable living trust must be funded during the grantor’s lifetime. This involves transferring ownership of assets into the trust. Proper funding is essential for the trust to function as intended and to simplify probate.

Which Trust is Right for You?

Choosing between a testamentary trust and a revocable living trust depends on your specific needs and circumstances. If used in the correct circumstances both have the potential to save your family time and money.

A revocable living trust is an excellent tool for specific needs. In my practice, the most common reasons for incorporating a trust into an estate plan are; having a blended family; owning out-of-state vacation property; or needing to withhold assets from a beneficiary due to gambling or addiction issues. Additionally, since the federal estate tax threshold is very high and Colorado does not impose estate taxes, there is almost always no tax benefit.
Pro Tip: If you’re going to have a trust, fund it. Don’t leave a trust unfunded.

If you and your spouse are both parents to minor children or young adults, and you own real property in Colorado, including a second home, a testamentary trust could be a suitable option for you. This also applies if you’re a single parent. Many of our firm’s clients find themselves in this situation, especially if there are no gambling or addiction issues involved.
Pro Tip: Fund this trust using beneficiary designations and transfer-on-death accounts. If you’re married, name your spouse first, then the trust. If you’re single, name the trust as the beneficiary.

Conclusion

Both testamentary trusts and revocable living trusts have their distinct advantages and potential drawbacks. When deciding which is best for you consult with an experienced estate planning attorney. An attorney can help you understand these differences and guide you in making the best decision for your unique situation. With the right trust in place, you can ensure that your estate is managed and distributed according to your wishes. Giving you peace of mind for you and your loved ones.