The choices between Estate Planning documents seem really daunting and endless. While the options for drafting them are limitless (which is a good thing!), it's actually pretty easy to choose the right type of documents.
The basic difference between a testamentary trust and a living trust is fairly simple. A testamentary trust is one that is in a last will and testament; the will tells the executor of the estate to create it. A living trust is set up by a person while they are alive.
Although the will is drafted while its creator is alive, the trust itself doesn't come into existence until the will is probated and the executor settles his estate, and this can't happen until his death. The trust, therefore, isn't "living." A testamentary trust is sometimes called a "will trust," or a "trust under will."
A custodial account is the type of account that is created if you die with only a will or even with a will that has a Testamentary Trust. The purpose of this account is to have someone (of your choosing) to hold the money for the child(ren) while under a stated age. With a custodial account, however, the beneficiaries (kids) own the account and have full access to all the assets at stated ages. When the child named in the custodial account becomes an adult (at whatever age you choose), he or she is free to spend that money anyway he or she sees fit. That means they can use it to pay for college, put a down payment on a house, or blow it all on a fancy new car.
Revocable Living Trust
A Revocable Living Trust is not only for families with millions whose kids go to private school. A trust not only provides the person giving the money with a more control, but it offers greater asset protection for the beneficiaries (children/grandchildren) also. Since a Revocable Living Trust owns the assets, once you pass the trust keeps the assets protected from creditors and potential divorce or separation proceedings of your beneficiaries in the future. You get to set the terms of the trust and determine at what ages, life events, or other intervals assets are to be dispersed. You also get to choose how much they get at every interval, either a dollar amount or a percentage of the available assets. You can also impose additional restrictions, such as attending an institution of higher education or securing employment before your kids would be eligible for a distribution.
Irrevocable/Special Needs Trust
An irrevocable trust involves three individuals: the grantor, a trustee and a beneficiary. The grantor creates the trust and places assets into it. Upon the grantor’s death, the trustee is in charge of administering the trust. This means that he or she is responsible for distributing the assets in the trust according to the grantor’s wishes. The trustee has an important job, as he or she must protect the assets. The beneficiary is the person who receives benefit of the assets.
Assets placed into the trusts are considered gifts and cannot be removed at a later date. The grantor, however, does have the ability to create the exact terms and rules that others must follow. For example, the grantor may specify that the money placed in an irrevocable trust gets used for a specific purpose, such as for college or a wedding.
Irrevocable trusts can be great tools for estate planning because an irrevocable trust removes assets from a person’s estate – while the person is still alive. Why would anyone want to do that? Because by doing so, it will remove the assets from getting taken in a lawsuit, being taken by other creditors, or adversely effecting one’s ability to qualify for government assistance. This means that the grantor or the beneficiary of the trust won’t have to worry about the seizure of trust assets. Plus, it removes the asset’s tax implications upon the grantor’s death. So, irrevocable trusts protect assets, eliminate probate fees and reduce estate taxes, which is why people use them.
Trusts and Probate
Living trusts -- both revocable and irrevocable -- avoid probate of the property they hold because the trust entity and not the decedent technically owns that property. Probate is only necessary to move ownership from the name of an individual who is deceased to those of his/her living beneficiaries.
A testamentary trust can't avoid probate because the property to be transferred into it remains in the decedent's name at the time of his/her death -- the trust hasn't been formed and funded yet. Probate is necessary to move that property into the name of the trust, just as it would be to transfer it into the names of living beneficiaries.
Hammelman Law, PLLC handles estate planning and business law matters in Northern Virginia and Maryland. In Virginia we are given the title of Attorney and Counselor at Law. Melanie Hammelman takes not only the title of Attorney seriously, but the title of Counselor at Law, as well. Melanie provides her clients with advice and counseling as to the best options for an estate plan, given the specific family situation and ultimate desire for asset distribution, all at affordable rates.