From Our “Ask a Question,” Mailbag: “What is the Difference Between Will and Testamentary Trust?”
Estate Planning Lawyer, Peter Klenk
What is the Difference Between Will and Testamentary Trust?
Testamentary means that the Will is created by your “Last Will and Testament.”
Whether you are doing Estate Planning in Philadelphia, Estate Planning in Burlington County, or anywhere else, this question comes up all the time. In short, a Will is a document that says what happens to your assets at your death. Your Will can form a protective trust for the beneficiaries. These trusts are valuable. The protect the inheritance from divorce and creditors. If your Will creates a Trust, it is known as a Testamentary Trust. Trusts that you form during your life, outside the will, are Inter Vivos Trusts.
Let me give you some details.
What is a Testamentary Trust?
A Will can create a protective testamentary trust, or it may not. If the Will does not form a trust, typically assets pass outright to beneficiaries. Outright means the recipient gets the inheritance into their name unprotected. For example, if your child filed for bankruptcy, and then you die, his inheritance now passes to his creditors. In the alternative, your Will can form a Trust. We can craft the Trust giving the Trustee discretion on paying the beneficiary’s bills. Or not. Using the same example, the trustee now can use the funds to support your child, but not have the funds pass into the bankruptcy. Because this Trust is formed in the “Last Will and Testament” it is deemed a “Testamentary Trust.”
For more information about Estate Planning and using trusts in your Will, follow this link to Estate Planning All You Need to Know.
If you would like to read more about
Types of Testamentary Trusts.
Not all trusts are the same. Trusts vary greatly, depending on their intended purposes. Here are some examples, along with some links to more detailed information.
- Disclaimer Trusts: Disclaimer trusts are tools specifically designed to help protect a surviving spouse. The critical difference is that funding the trust happens ONLY if the surviving spouse takes the step to “disclaim” the asset. Typically, the spouse is also the trustee. Inexpensive, flexible, and providing the surviving spouse with protection from creditors and future spouses, the Disclaimer Trust is an excellent tool. Follow this link to learn more about Disclaimer Trusts.
- Education Trusts: If you want to limit the use of your estate to pay the costs of education for your heirs, using an Education Trust is an excellent tool. The trust protects your money from your children’s divorce and creditors and can mean generations of your descendants will toast to your memory on Friday beer night. For more information, follow this link on Education Trusts.
- An A/B Trust: Tried and true, this arrangement forms a protective trust for your spouse. Unlike the Disclaimer Trust, there is no option for the spouse to take the funds themselves. Typically, you would use a trust company to manage the assets. AB Trusts are a long-practiced tool that has held up over time. For more details, follow this link to an article about AB Trusts.
In Conclusion: What is the Difference Between Will and Testamentary Trust.
I hope you found helpful this short article about What is the Difference Between Will and Testamentary Trust. I have also included some links for more detailed information. If you are curious about updating your Will, Power of Attorney, or Living Will, contact us and let our Estate Planning lawyers help walk you through what can be a confusing process. In fact, feel free to contact our office for a free consultation.
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