Living vs. Testamentary Trusts in California

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Besides Wills, trusts are arguably the most popular (and commonly used) documents for California estate planners. Trusts allow grantors to pool assets into one place and write specific instructions for trustees on distributing those assets. The main reason for creating trusts is the ability to avoid probate, a somewhat long and expensive legal process. 

Not all trusts, however, allow the grantor’s loved ones to avoid probate. A testamentary trust is a type of trust that is created after the grantor dies. This type of trust is created by the grantor’s Will. The only way to execute the provisions laid out in a decedent’s Will in California is to enter the document into probate. 

So, while a testamentary trust does not always allow the assets funded into the trust to avoid probate, many Californians still use testamentary trusts as part of their estate planning strategy. Why? Well, because a testamentary trust allows the grantor some control over the assets during his or her lifetime. After the grantor passes away, the testamentary trust, which is considered an irrevocable trust, is created. Irrevocable trusts can sometimes protect assets against judgments and creditors.

How is a Living Trust Different from a Testamentary Trust?

Whereas a testamentary trust only becomes active after the grantor passes away, a living trust becomes active as soon as the grantor signs on the dotted line(s). This allows the grantor almost complete control over the living trust’s assets as long as the grantor has capacity (and the living trust is designated as “revocable”). Unlike testamentary trusts, living trusts generally allow the grantor’s loved ones to completely avoid probate. 

One of the greatest benefits of living trusts is allowing beneficiaries to continue receiving distributions before the grantor passes away but after the grantor loses capacity. For instance, the grantor might contract a serious illness and slip into a coma. If the incapacitated grantor created a living trust, the successor trustee would be able to step in and carry out the living trust’s instructions with minimal delay. 

Many estate planners assume that trusts can help their estates and beneficiaries avoid taxes. Whether or not that’s true in any particular case depends on the type of trust used and the state the grantor lived in. Because living revocable trusts allow the grantor significant control over the assets, it typically does not help the estate avoid taxes. 

Unfortunately, testamentary trusts also do not help grantors avoid estate taxes. If one of your primary estate planning goals is to avoid estate taxes, you should speak with your attorney about an irrevocable living trust.

Living trusts and testamentary trusts share many characteristics, but only one is active while the grantor is still alive. This can present various challenges and opportunities for estate planners in the areas of asset protection, tax avoidance, and probate. For experienced legal representation, reach out to Anthoor Law Group. Our caring team understands the many complexities of estate planning, and we will do whatever it takes to accomplish your goals.

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