December 6, 2013   Trusts

Is a Trust in a Will the Same as a Living Trust?

By Vickie Schumacher
Many people hear or see the word “trust” in estate planning and think they are all the same. But there are different kinds of trusts for different purposes, and they perform differently.
 
For example, an irrevocable trust is frequently used in tax planning. Generally speaking, once an irrevocable trust is established, you cannot change it or remove assets that have been transferred into it. These include charitable trusts, life insurance trusts, asset protection trusts, grantor trusts, qualified personal residence trusts and others.
 
A testamentary trust is created after you die by a provision in your will. This is a “trust in a will.” It can be used in tax planning or to manage assets for minors or other beneficiaries. Common estate planning trusts used by married couples, like an A-B trust, or credit shelter trust, or QTIP trust, can be part of a testamentary trust. But because a testamentary trust is part of a will, it cannot go into effect until after you die and your will has been probated. It provides no protection or instructions in the event of your incapacity, and any provision you have made for others in your will cannot go into effect. If you have a trust in a will and become incapacitated, your family will probably have to go through the probate system twice—first, for a guardianship at the incapacity and then to probate your will after you die. Both processes are public, and can become expensive and time consuming.
 
A revocable living trust, known simply as a living trust, is now preferred over a will by many consumers and professionals. While it is similar to a will in that it has instructions for what you want to happen to your assets after you die, it also contains instructions in the event you become incapacitated. It becomes effective while you are living instead of only after you die. When you set up a living trust, you transfer ownership of your titled assets from your individual name to the name of your trust, which you control. (This is called funding your trust.) Technically you no longer own anything, so there is no reason for the courts to become involved when you die or if you become incapacitated. The concept is very simple, but this is what keeps you and your family out of the courts.
 
So, how do you know which kind of trust you have? You can read the document; it should say “revocable living trust” or “last will and testament” right up front. Or ask the attorney who prepared it for you.
 
Here’s the bottom line. If you did not transfer your assets to your trust, you either have a testamentary trust (trust in a will) or an unfunded living trust—neither will prevent court interference at incapacity or death. If that is your desire, take action now before it is too late.
 
 
Vickie Schumacher is the author of the best-selling book, “Understanding Living Trusts.®” The sixth edition is currently in production.
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