What Are Inter Vivos Trusts and Testamentary Trusts?
An inter vivos trust is a trust that a grantor creates which functions during his or her lifetime. A testamentary trust is a trust that may be created upon the grantor’s death. Whether the trust is governed by a last will or not affects estate administration and tax considerations.
Inter vivos trusts: When trusts aren’t governed by a will
Inter vivos trusts are created during the grantor’s lifetime. These trusts are governed by a legal document other than a will. Because an inter vivos trust is not governed by a will – which becomes public after it’s filed for probate administration – the provisions of an inter vivos trust remain private.
Inter vivos trusts can be funded before or after the grantor’s death. If funded during the grantor’s lifetime, the trustee must see if the trust is a grantor trust (where the grantor controls the property in the trust) or an intentionally defective grantor trust. This determines whether the trustee reports the income on the grantor’s Form 1040 or on a Form 1041 for the trust.
Inter vivos trusts may be revocable (able to be amended or terminated) or irrevocable. After the grantor’s death, all inter vivos trusts become irrevocable.
A grantor uses inter vivos trusts to remove property from his or her estate for probate purposes. If the trust was a non-grantor (where the grantor forfeits all rights to property in the trust) or intentionally defective grantor trust during the grantor’s lifetime, this property is usually excluded from estate taxes. If the trust was treated as a grantor trust all property inside the trust must be included in estate tax calculations.
Testamentary trusts: Trusts created under a Last Will
A testamentary trust is contained in the decedent’s Last Will. Testamentary trusts are only funded after the grantor’s death and are therefore always non-grantor-type trusts.
In most states, testamentary trusts must provide the probate court with an annual account. There are penalties for trustees who fail to file these accounts, so check the requirements of the probate court involved. Probate accounts are a matter of public record, and anyone may access them.