Adults may add trusts to their estate plans for many different reasons. Perhaps they wish to protect certain assets from creditors or increase their chances of qualifying for Medicaid benefits later in life. Maybe they worry that an adult child who may inherit from their estate could divorce and lose their inheritance, or maybe the concern is that someone with a substance abuse disorder might burn through a lump-sum inheritance quickly.
Regardless of why someone wants to create a trust, they have many important decisions to make with regard to its creation and maintenance. Choosing the type of trust is among the most influential decisions someone makes while estate planning. For example, they will need to choose between a testamentary and an inter vivos trust, to start.
What is a testamentary trust?
Someone can provide instructions for the creation of a trust in their will. The trust is a legal instrument created to facilitate the transfer of their resources after their death or control how beneficiaries use their inheritances. The assets used to fund the trust may pass through the probate courts and could be subject to creditor claims and might contribute to estate tax risks if someone owns millions of dollars of property when they die.
What is an inter vivos trust?
Unlike a testamentary trust, someone creates an inter vivos trust while they are still alive. There are many different types of inter vivos trusts, including both revocable and irrevocable trusts. Testators may create these trusts in particular when they want access to or control over the resources that they used to fund the trust. Inter vivos trusts can help protect assets from a trustor’s divorce or debts.
Which one is the right option?
The type of trust someone creates influences whether it can affect resources from creditor claims and many other key considerations. It can be a very difficult process for a testator to determine on their own what type of trust is the best given their personal resources and current circumstances.
Oftentimes, an in-depth review of someone’s needs as they age, their current family relationships and their goals for estate planning can help narrow the field as they attempt to select the right kind of trust to create. Taking the time to draft and properly fund a trust can ultimately result in a major impact on someone’s legacy after they die and their comfort later in life.