You have probably heard that trusts can help families avoid probate and protect assets for the people you love. You may have even spoken with a lawyer who suggested including a trust inside your will. On the surface, that sounds like a good solution.
But here is something many people do not realize: a trust created in your will works very differently from a living trust you create during your lifetime. That difference can have a significant impact on your loved ones after you pass away.
Both options use the word “trust,” which makes them sound similar. In reality, the experience your family will have after your death depends greatly on which type of trust you choose. Even more important, each approach serves different planning goals.
In this two-part series, I will explain how these two types of trusts work and help you decide which approach best fits your situation. In Part 1, we will look at what happens when a trust is created inside a will and why it is important to first understand what you are trying to accomplish with your estate plan.
What Happens When You Create a Trust in Your Will
A trust created inside your will is called a testamentary trust. This type of trust does not exist while you are alive. It only comes into existence after you pass away and after the probate court process is completed.
For example, your will might say something like:
“Upon my death, I direct that my assets be held in trust for my children until they reach age 25.”
This type of provision can be helpful because it allows you to control when your children receive their inheritance. However, it does not keep your family out of court.
When someone dies with a will, the will must go through the probate process. That means your loved ones must go to court before the trust described in your will can even be created.
Probate often takes several months, and in some cases more than a year. During that time, your assets may be tied up in the process. Your family may have limited access to funds while they wait for the court to complete its review.
Here is what that process typically looks like:
- Your family must locate your original will and file it with the probate court.
- The court appoints the executor you named in your will.
- The executor must notify heirs and creditors of your death.
- Your executor gathers your assets, values them, and pays debts and taxes.
- Detailed reports are submitted to the court for approval.
Only after the court approves everything can your assets finally be transferred into the trust described in your will.
This process can also be expensive. Probate may include:
- Court filing fees
- Attorney fees
- Appraisal costs
- Accounting fees
These costs are paid from your estate, which reduces what your loved ones ultimately receive.
Probate is also a public process. That means information about your assets and beneficiaries becomes part of the public record.
In many ways, creating a testamentary trust means your family goes through two steps to reach the same result that a living trust could accomplish more directly. The trust eventually provides protection, but only after your loved ones go through the entire probate process first.
And there is another important limitation. Because a will only takes effect after death, it cannot help you if something happens while you are still alive.
What a Will Cannot Do While You Are Alive
A will only becomes effective after you pass away. It does not help manage your affairs if you become incapacitated.
If you become unable to manage your finances due to illness, injury, or cognitive decline, most people rely on a Power of Attorney to allow someone else to step in and handle financial matters.
But there is an important limitation many people do not realize:
a Power of Attorney ends the moment you die.
That creates a difficult situation.
Once you pass away, the person acting under your Power of Attorney immediately loses authority. At the same time, your executor cannot act yet because the probate court has not officially appointed them.
During this period:
- Bank accounts may be frozen
- Bills may go unpaid
- Your family may not be able to access funds
This gap can create financial stress and confusion for your loved ones.
A living trust avoids this problem because it exists while you are alive. If you become incapacitated, your chosen successor trustee can step in and manage the trust assets without court involvement. When you pass away, that same trustee can continue managing and distributing the assets without interruption.
There is no gap in authority and no waiting for court approval.
This brings us to the most important question in estate planning.
What Are You Really Trying to Accomplish?
Before deciding between a testamentary trust and a living trust, it helps to take a step back and think about your goals.
Many people say they want “a trust” simply because they have heard that trusts are good planning tools. But different types of trusts solve different problems.
Here are a few questions to consider.
Do You Want to Avoid Probate?
If keeping your family out of probate court is important to you, the type of trust you choose matters.
A testamentary trust does not avoid probate because the trust is created through the probate process.
A living trust does avoid probate because the trust already exists and holds your assets during your lifetime.
If avoiding probate is your main goal, a living trust is usually the better option.
Do You Want to Control How Your Beneficiaries Receive Their Inheritance?
Many people want to prevent young beneficiaries from receiving a large inheritance too early.
Both testamentary trusts and living trusts can accomplish this goal. You can set rules about when and how assets are distributed, such as waiting until a child reaches a certain age.
However, with a testamentary trust, assets may not be available to your beneficiaries until the probate process is finished. With a living trust, distributions can often begin much sooner.
Do You Want Protection During Incapacity?
A testamentary trust does not exist until you pass away. That means it cannot help if you become incapacitated during your lifetime.
In that situation, your family may need to go through a guardianship or conservatorship proceeding in court to manage your finances.
A living trust allows your successor trustee to step in immediately and manage your assets without court involvement.
Understanding Your Priorities Makes the Decision Clearer
Choosing between these options becomes much easier once you understand your priorities.
If your main goal is simply controlling how assets are distributed to your beneficiaries, a testamentary trust may accomplish that purpose.
However, if you want to:
- Avoid probate
- Protect your family from delays and court involvement
- Ensure someone can manage your assets if you become incapacitated
Then creating a living trust during your lifetime may be the better solution.
The key difference comes down to timing. A testamentary trust is created after your death through probate. A living trust is created now and can protect you and your family both during your life and after you pass away.
Coming Next: How Living Trusts Work
In Part 2, I will explain how living trusts work and help you evaluate whether they are the right tool for your situation.
Understanding both options will allow you to make an informed decision about how best to protect the people you love.
How I Help You Identify What Matters Most
As a Life & Legacy Planning attorney, I do not start with documents. I start with understanding what matters most to you.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. The Life & Legacy Planning Session will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today. you love means planning with clarity – not guesswork.