People are becoming more sophisticated about the type of trusts they are getting, so I don’t see as many testamentary trusts as I used to. But there are still lots of people with them who have told me their trust was going to avoid probate when they die. They were dead wrong.
A testamentary trust guarantees probate. A revocable living trust gives you, or rather your family, a shot at avoiding probate. However, the vast majority of folks that get a revocable living trust end up having to deal with probate, just like the folks that get a testamentary trust, because they didn’t use or fund the trust appropriately. So why get a revocable living trust, when it is usually cheaper to get a testamentary trust?
Thirty years ago, many lawyers would steer their clients toward a testamentary trust in preference to a revocable living trust. They made the argument that the testamentary trust was cheaper up front – was it really? They made the argument that the testamentary trust didn’t take any thought or effort to operate during their lifetime. They made the argument that the family would probably go through probate in either case, which was actually true.
And yet, everyone always says they want to avoid probate for their family. What’s the deal?
The word testamentary means relating to or the process of bequeathing or appointing through a will. A testamentary trust is established within a will. The testamentary trust is sometimes referred to as a “trust under will.”
Basically, all of the estate’s assets are passing under the will, which requires a probate proceeding – a complicated and expensive probate proceeding. A will has no legal power until the probate court gives it its power. Thus, everything is probated and then it is placed in the testamentary trust laid out in the will. This trust is actually established by the court using the terms outlined in the will. You may design the terms of the trust during your lifetime, but the trust is not established during your lifetime. It is an after death (testamentary) trust, not a revocable living trust.
Once the court establishes the testamentary trust and all of the assets are probated and placed into the trust, the assets are distributed to or held in trust for the benefit of the beneficiaries (heirs). Because the trust was created by the court, the court will have control over the trust forever.
Of course, this trust has to account to the court and be represented in court periodically or whenever the trust does something significant. Thus, the attorney has a long term employment opportunity. I have often called a testamentary trust “the attorney’s retirement plan.”
You can tell if you have a testamentary trust, because the document that created the trust will say “Will …..” on its face. If your trust is a revocable living trust, it will usually have the word “Living” or “Inter Vivos” in the title. Sometimes a revocable living trust may simply have the title of the trust, such as “The Jones Family Trust,” but the language in the trust document will start out in the present tense.
The revocable living trust is established during your life, not after your death, as a testamentary trust is. The revocable living trust will avoid probate, provided it is used properly. Most often the attorney or internet site that you use to establish your revocable living trust will not educate you on the “use” of your trust. I have a full series of YouTube videos and articles on how to use your revocable living trust to make sure it avoids probate. The revocable living trust kits I have include hours of audio instructions on how to use the trust. Even if you already have a revocable living trust, it is important to learn how to use the trust during your lifetime.
If you don’t use your revocable living trust because of ignorance, laziness, or stupidity, then you should have probably just gotten a testamentary trust and not fantasize about avoiding probate. The argument in favor of testamentary trusts is based on keeping the public ignorant. The solution to probate avoidance is education and the establishment of a good revocable living trust.