There are a number of reasons why individuals fund trusts. They often do so to shield assets from creditors if they were to face a lawsuit. A testator may also do so to preserve their eligibility for Medicaid and other government benefits.
Some individuals may also fund trusts to ensure that their loved ones, such as minor children, are cared for once they’re gone. Funding a testamentary trust can help you do this.
What should you know about testamentary trusts?
A testamentary trust is an estate planning tool that you draft via your will. It outlines your assets and whom you plan to leave them to once you pass away. The transfer of these assets occurs after your death as per your instructions. Testators and trustors can take their assets and place them into various testamentary trusts earmarked for different individuals or entities.
What distinguishes a living trust from a testamentary trust?
One main difference between a living trust and testamentary trust is when they go into effect. A living trust goes into effect while the trustor is still alive. The testamentary trust only becomes effective after they pass away.
Another difference between the above-referenced types of trusts is revocability. A testator can make modifications to their testamentary trust until their death. It only becomes irrevocable, meaning no changes can be made to it once the trustor dies. A living trust is usually revocable.
Many individuals fund trusts with the intention of avoiding the probate process. That’s not possible when you fund a testamentary trust, though, since a testator’s assets are in their control up until their passing.
Should you fund a testamentary trust?
As the saying goes, “knowledge is power.” You may want to learn more about the pros and cons associated with testamentary and other types of trusts. This understanding can help you gain some perspective on which one of these best helps you leave behind the legacy you want.