Trusts: To Create During Life (Inter Vivos) or Not to Create During Life (Testamentary)

By: Samantha K. Wolfe, Esquire, LL.M. in Taxation
Of course, people are getting smarter nowadays; they are letting lawyers instead of their conscience be their guides.                                  - Will Rogers, American Cowboy and Humorist
People are uncomfortable around attorneys. Recently, I attended a party and when I was introduced to some fellow partygoers and they asked my occupation, I said “Oh, I’m an attorney. But, don’t worry, not a real one.” The fact is, I am an attorney. A real one. No, I do not often appear in a courtroom, but I attended law school. I took the bar exam to become licensed to practice law in Pennsylvania. I love my job. I love working with clients. I wish I could go back and amend my introduction; I would say, “Oh, I’m an attorney who helps clients achieve their estate planning goals for future generations.” I am on the same team as my clients. We want to achieve the same goal. 
The Law Offices of Samantha K. Wolfe, LLC is a law firm that focuses on estate planning, asset protection planning, supplemental needs planning, long-term care pre-planning, estate administration, and business succession planning. We use the law for good; to help our clients design the best estate plan for them as individuals. A lot of what we do revolves around trusts. We love trusts, and are comfortable, and confident, with trusts. Trusts can be an essential tool for estate planning and asset protection planning. Part of our job as a law firm is to review trusts that clients may have executed prior to engaging our law firm to determine if the trust is needed, and if so, whether there are any changes needed to be made to the trust to plan for the second half of life. Occasionally, a client will come to our office with a testamentary trust created through the provisions of their Last Will and Testament. 
A testamentary trust is one that is created through a Last Will and Testament. It provides for the distribution of all or part of the estate. Because a testamentary trust is created upon death, the person cannot fund the testamentary trust during life. On the other hand, an inter vivos trust is one that is created by someone during his or her life. Assets can be transferred to an inter vivos trust during life or upon death. For example, a Last Will and Testament can include a provision that certain assets pay to an inter vivos trust. 
Our office prefers using an inter vivos trust instead of a testamentary trust. Here are nine things to know about the difference between testamentary trusts and inter vivos trusts: 

1. A testamentary trust is only created when the testator or testatrix, the individual that executed the Last Will and Testament, dies. A testamentary trust offers no benefit to the testator or testatrix during his or her life. The individual who creates an inter vivos trust, the grantor, can transfer assets to the inter vivos trust during life and use the trust while living. 
2. A testamentary trust is irrevocable, so the only way the terms of the trust can be changed is to execute a new Last Will and Testament. An inter vivos trust can be revocable or irrevocable depending on what you want to accomplish. A revocable inter vivos trust can be changed at any time without having to execute a new Last Will and Testament. The grantor of an irrevocable inter vivos trust may have the ability to add or remove beneficiaries depending on the provisions of the trust. 
3. A testamentary trust is subject to the Pennsylvania probate process, and is under court supervision. In order to establish the testamentary trust, the decedent’s Last Will and Testament needs to be admitted to probate. An inter vivos trust is a contract between private parties and does not require ongoing court supervision. If the inter vivos trust is funded by assets through the Last Will and Testament, those assets do have to be probated. If the inter vivos trust is funded during life, however, those assets do not need to be probated when the grantor dies. 
4. A testamentary trust does not include provisions regarding disability since it is not created until the testator dies. An inter vivos trust can be privately managed without any court involvement if the trust creator, the grantor, becomes disabled. When our office prepares an inter vivos trust, we include provisions that address how to appoint a successor trustee to manage the trust if the grantor becomes incapacitated. 
5. Testamentary trusts are frequently used for families with underage children, but Pennsylvania does allow an individual to establish a Uniform Transfers to Minors Act (UTMA) account for anyone under the age of 25. This allows the testator or testatrix under the Last Will and Testament to appoint a custodian for any beneficiary under the age of 25. That custodian holds those assets for the benefit of that underage beneficiary until that individual attains age 25. At age 25, the funds are transferred to that beneficiary. The beneficiary has guidance until attaining a more mature age without the hassle of administering a testamentary trust. 
6. Because a testamentary trust is part of the Last Will and Testament, it typically contains only the essential provisions and relies on the Pennsylvania Uniform Trust Act to provide the rest of the provisions for the trust. The issue with relying on the statutory provisions for a trust is that you don’t know what the Pennsylvania Uniform Trust Act is going to be at the time of your death. When you create an inter vivos trust, you can provide for all of the situations you want, and you are not stuck with default trust provisions that you don’t know. You will know what those provisions are at the time you create the trust and won’t have to guess. 
7. Typically, a testamentary trust is existence for as long as the provisions included in the Last Will and Testament specify (for example, until the child is age 25) or until someone petitions the court to terminate the trust because the trust is no longer economically feasible. An inter vivos trust can provide an internal mechanism under which the trust can be terminated without court involvement. This is especially important when you don’t know what the future holds for your beneficiaries. 
8. A lot of the testamentary trusts we review were created under Last Will and Testaments executed prior to the medicare surtax and the graduated trust tax rates. Because these trusts are irrevocable, non-grantor trusts, the trusts may be subject to the highest income tax rate of 37.0% (2021) and the net investment income surtax of 3.8% since the legal professional who prepared those documents was not considering the changes in the tax law. Under the inter vivos trust, you have the freedom to expand on those provisions of the trust and address any future tax situation.  
9.  Creating an inter vivos trust makes it much easier to designate the trust as the beneficiary of life insurance policies or retirement accounts because the trust is already in existence. You can ensure that the provisions of the inter vivos trust will achieve the trust out while you are living instead of waiting until you pass away to ensure that.

 
Death is not the end. There remains the litigation over the estate.
                                                                                                                -Ambrose Bierce
 
Inter vivos trusts and testamentary trusts are both tools used for estate planning purposes. There are situations that may be better served by utilizing an inter vivos trust instead of establishing a trust through your Last Will and Testament. Please make sure to discuss with your legal professional the goals you hope to accomplish so that the professional can advise you on which type of trust is best suited for your needs. If an inter vivos trust is the recommended technique, do not be overwhelmed by the fact that the trust exists during your life or may be a lengthy document. When you have a trusted legal professional as part of your team, this professional can advise you every step of the way.