Part 1: Introduction to the differences between Living Trusts and Testamentary Trust Planning
- Is it valid to compare a simple will to a living trust-centered estate plan?
- What are the similarities between living trust-centered planning and testamentary trust planning?
- What are the differences between living trust-centered planning and testamentary trust planning?
- Is living trust-centered planning preferable to testamentary trust planning?
In most instances, trust critics compare living trusts to simple wills. Comparing a people-oriented living trust-centered estate plan to a simple will is like comparing a motor vehicle to a bicycle and then saying the latter is less complex and therefore better. It is a comparison that is not relevant.
A simple will distributes property outright only to heirs. Simple wills almost always contain language that says, “To my spouse if living, and if my spouse is not living, then to my descendants per stirpes”. Simple wills do not provide for tax planning or include instructions for loved ones. If a simple will is compared to a living trust, the living trust is better for virtually all planning purposes. An argument can be made that a simple will has a few minor advantages, but even these advantages quickly disappear when testamentary trust planning and living trust planning are compared. To level the playing field, it is critical that the debate ultimately be focused on the testamentary trust versus the living trust. When this comparison is made, the distinctions and similarities between them become readily apparent.
A testamentary trust is a trust that is created by a will. A testamentary trust does not have an independent existence until after the death of a will maker and receives property only at the death of the will maker. Once it is created by a will, a testamentary trust functions exactly the same but for one important feature: A testamentary trust can be subject to the Estate winding up process for part or all of its existence. A living trust is not subject to this either during the life of its maker or after his or her death.
Most practitioners prepare wills as loss leaders that become an estate winding up which, like an annuity, will generate future fees. There are a number of estate practitioners who routinely prepare wills that create testamentary trusts for minor children and affluent couples with taxable estates. The more sophisticated planning practitioners create trusts for children and descendants with extensive wishes. A major difference between living trust lawyers and will planning/ Estate lawyers is in their opinion about when trust planning should begin. Should it come into effect immediately or only upon death? Will-planning/ Estate advocates would argue that death is soon enough for a trust to come into existence. Advocates of living trust centered planning would argue that a trust cannot be instituted soon enough.
Regardless of whether a practitioner uses living or testamentary planning, there is little or no difference in time he or she will spend with a client or in the preparation of the appropriate documentation.
In Part 2 of this article we unpack the roles of an Estate Lawyer vs a Trust Lawyer.