Testamentary Trusts v. Revocable Living Trusts

Which is better – a trust written inside a Will (a Testamentary Trust), or a Revocable Living Trust?  The answer depends upon your situation and preferences.

A Testamentary Trust only becomes effective upon your death, at which time the trust becomes irrevocable. A Revocable Living Trust is effective as soon as you create it during your lifetime, and is amendable and revocable until you become mentally incapacitated or die. 

Both types of trusts can control the ages at which your children gain control of their inheritance. And both trusts can create the possibility of estate tax savings.

If privacy is of concern, a Revocable Trust is better. Your Will, which includes the Testamentary Trust provisions, is filed with Minnesota’s probate court after you die. In other words, it becomes a public document. A properly drafted and funded Revocable Trust avoids probate. As part of the probate process, Minnesota law requires that notice of the probate proceedings be given to certain “interested”
persons. The notice requirement may be of concern if you’ve left a child or other logical potential beneficiary out of your Will. 

A Revocable Trust also works best in situations where family members are expected to fight over your assets. The private nature of a Revocable Trust makes it more difficult for potential objectors to know if it is economically worth the effort to challenge your estate plan. In contrast, the public nature of a Testamentary Trust makes it possible for objectors to learn something about the potential size of your estate.

Moreover, because assets held in a Revocable Trust can often be distributed more quickly than is the case with an estate being handled by the probate court, the assets could be distributed before an attack was launched.  In addition, as a practical matter, a Revocable Trust is harder to challenge when a court would need to set aside actions taken by the trustees that likely occurred over many years.

A disadvantage of a Revocable Trust is the time required by you to re-title assets into the name of your Revocable Trust after creating the trust. When you have a Testamentary Trust, the assets remain in your name during your lifetime because the Testamentary Trust doesn’t exist as a trust until after your death.

Attorneys typically charge a little more for a Revocable Trust because they spend time advising clients which assets should be retitled into the name of the Revocable Trust, and provide guidance as to how to do so. A Revocable Trust also requires more attorney labor because two documents are required to make a Revocable Trust work correctly – the Revocable Trust and an accompanying Will that transfers any assets still held in your name at death to the Revocable Trust. Only one document is used for the Testamentary Trust given that it is part of the Will document.  

During your lifetime, earnings on the assets held in the Revocable Trust are included on your personal tax return. No separate tax return is necessary.

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, Minnetonka. 952-649-9771  www.bwittenburglaw.com   bonnie@bwittenburglaw.com