Inter Vivos vs. Testamentary Trusts: An Overview

Estate planning offers tools to establish and maintain effective control over cash, investments, and real estate assets during a person’s lifetime and upon death. While wills and beneficiary designations work well to ensure an estate plan meets the unique needs of the individual establishing the plan, each has its limits. Trust documents enhance estate planning and the effective transfer of assets to heirs. A trust created while an individual is still alive is an inter vivos trust, while one established upon the death of the individual is a testamentary trust.

Inter Vivos Trusts

Also known as a living trust, an inter vivos (sometimes written with a hyphen or as ‘intervivos’) trust is created for the purpose of estate planning while an individual is still living. It is drafted as either a revocable or irrevocable living trust and allows the individual for whom the document was established to access assets such as cash, investments, and real estate property named in the title of the trust while they are still alive. Inter vivos trusts that are revocable have more flexibility than those that are deemed irrevocable, but both types of living trusts bypass the probate process once the trust owner passes away.

An inter vivos trust is effectively a legal document created while the individual for which the trust is drawn up is still living. The assets are titled in the name of the living trust by the trust owner and are used or spent down by the trust owner while they are alive. Once the trust owner passes away, the designated beneficiaries of the trust are granted access to the assets, which are then managed by a successor trustee. A living trust is created as either a revocable or irrevocable, and each type of inter vivos trust has a specific purpose.

Testamentary Trusts

A testamentary trust (or will trust) is created when an individual dies and the trust is detailed in their last will and testament. Because the establishment of a testamentary trust does not happen until death, it is by nature irrevocable once death occurs. The testamentary trust is a provision made in the will that instructs the executor of the estate to create the trust. So even though the testator creates the will while he is alive, the trust does not come into play until after their death. After death, the will must go through probate to determine its authenticity before the testamentary trust can be created. After the trust is created, the executor follows the directions in the will to transfer property into the testamentary trust.

A testamentary trust does not protect an individual’s assets from the probate process, and as such, the distribution of cash, investments, real estate, or other property may not conform to the trust owner’s specific desires. This type of trust is designed to accomplish specific planning goals such as:

• Preserving assets for children from a previous marriage
• Protecting your spouse’s financial future by providing lifetime income (also referred to as a qualified terminable interest property trust)
• Ensuring that a special needs beneficiary will be taken care of
• Preventing minors from inheriting property outright at age 18 or 21. Minors are unable to take legal title of assets or property until they reach legal age, which varies by state. Trusts are often used for the safekeeping of their assets until they can take full title.
• Skipping the surviving spouse entirely as a beneficiary
• Gifting to charities

The testamentary trust allows grantors to take advantage of an estate tax reduction through the unified credit shelter. This refers to the maximum amount of assets the IRS allows you to transfer tax-free during life or at death. The amount can be a substantial part of the estate, making this a very good option for financial planning.