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Trusts 101: Testamentary vs. Revocable vs. Irrevocable and When to Use Each

If you’re thinking about estate planning and have begun doing preliminary research, you have probably seen all different kinds of trusts mentioned in the literature. Trusts pop up over and over in articles about estate planning both because they are complex and require often explaining and, more importantly, because they are versatile tools that facilitate a range of important estate planning aims. Not all trusts are the same, however, and understanding the differences is key to understanding how a trust might benefit you.

Three Basic Types of Trusts

While far more than three types of trust exist, those that come up most often in conversations about estate planning are Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts. Many of the different trust options are a subset of one of these three principal types and so grasping how each is used takes you far in understanding trusts, generally.

  1. Testamentary Trusts

‘Testamentary’ means related to or appointed through a will. Naturally, then, a Testamentary Trust springs into action when the creator (referred to as the grantor) dies and their will instructs that the trust be created. Prior to this, while the instruction to create a trust exists, the trust, itself, doesn’t. This makes Testamentary Trusts different from the examples discussed below.

People write Testamentary Trusts into their will for a range of reasons. If you, for instance, have minor children, a Testamentary Trust allows you to place restrictions on how and when their inheritance may be used. Alternatively, a Testamentary Trust may be used to shield assets from a beneficiary’s creditors. Lastly, Testamentary Trusts are popular because they allow the grantor to appoint a trusted friend, family member, or advisor to manage their estate after their passing–a feature that offers peace of mind.

  1. Revocable Trusts

Commonly referred to as Revocable Living Trusts or simply Living Trusts, the name arrives from the fact that a Revocable Trust is created while you are still alive. Like Testamentary Trusts, Living Trusts are popular among Texans because of their versatility. Their two most common purposes are:

  • Asset Distribution and Probate Avoidance

A Living Trust allows you to preplan the distribution of bank accounts, real estate, and many other assets. Because assets held within such a trust are exempt from probate, you need to worry about family in-fighting after you die and you can rest assured your life’s work will end up where you intend.

  • Incapacity Planning

Living Trusts also play an important role in incapacity planning. By placing assets in a trust and then designating a loved one to manage trust assets on your behalf should you suffer incapacitation, you protect yourself from adding financial insult to serious injury.

  1. Irrevocable Trusts

A Revocable Living Trust can be dissolved at any time; an Irrevocable Trust, on the other hand, cannot. This feature means Irrevocable Trusts offer special asset protection and tax shielding advantages. It is common, for instance, to purchase a life insurance policy through an Irrevocable Trust to prevent the payout from provoking unforeseen estate taxes. Irrevocable Trusts are also commonly used to protect the public benefits of a loved one with special needs by ensuring that any inheritance they receive does not count against their eligibility.

To learn more about the various benefits and uses of Testamentary, Revocable, or Irrevocable Trust or to talk about how a trust might fit into your estate plan, do not hesitate to contact the Hailey-Petty Law Firm either by calling (512) 910-8977 in Austin, (210) 570-2458 in San Antonio or by using the contact form on our website.