I have written extensively about the importance of creating a living trust (sometimes called an inter vivos trust) as a centerpiece of your estate plan. A living trust provides numerous benefits including allowing your loved ones to swiftly and privately manage your affairs, in the event of your incapacity or demise, without the assistance of the probate court.
Recently I was contacted by old friends who thought it might be time to review and update the trustee designations in their trust. Over the years, I had spoken many times to these friends about the importance of a having a living trust. These friends had repeatedly assured me that they had a living trust (created before they knew me) and had arranged everything many years earlier. I had even helped these friends when they functioned as trustees of another trust and so they were familiar with the operations of a trust and how it was administered. So imagine my surprise when I reviewed their plan and discovered that my friends’ trust was not a living trust, but rather a testamentary trust, or a trust created by a last will and testament.
The differences between a living trust and a testamentary trust are significant. Since it is created by a will, a testamentary trust only comes into existence through a probate proceeding. A testamentary trust thus requires that your executor apply to the probate court to create the testamentary trust. The probate (and trust) estate is then subject to the extensive costs of probate (generally 4% to 8% of the gross value) as well as the mandatory notice periods that require a probate proceeding to remain open for at least eight to twelve months. In many cases, a testamentary trust is the worst of both worlds because the creator will incur the additional expenses of creating a more complex document and force his or her beneficiaries to wade through the probate process. Moreover, the testamentary trust is only created upon your death and therefore does nothing to help manage your affairs if you become incompetent.
Time and time again I encounter clients who assumed that they had created a fully functional estate plan only to discover when it was too late that the plan was deficient. Frequently these mistakes are by “do it yourselfers” but sometimes the deficiencies arise from simply not reviewing an attorney-created plan for numerous years. When was the last time you reviewed your estate plan? Does it operate in the most efficient manner? Does it include sufficient contingency options to deal with the variety of problems we face in life? If you don’t know, now is a good time to review your plan with a professional.