By the time you start administering the trust, the distinction between a trust created during the grantor’s lifetime or after his or her death is probably moot. Still, you need to know whether the trust is inter vivos or testamentary.
Grantors’ reasons for establishing trusts vary, from protecting certain pieces of property to providing an income stream for heirs to trying to establish a framework within which a messy family situation may become manageable. Whatever the reason, a grantor may set up a trust that begins functioning during his or her lifetime, or trusts may be created upon the grantor’s death.
Trusts created during lifetime
As they craft their estate plans, many people want to retain the greatest amount of control possible over their estates during their lives and after their deaths. In order to do so, many create inter vivos trusts, which are trusts governed by a legal document other than their last wills.
As their Latin names suggest, these trusts are created “among the living” during the grantor’s lifetime. So basically because an inter vivos trust is governed by an instrument other than the will, its provisions remain private, unlike the will, which becomes public knowledge after it’s filed for probate administration.
That’s why inter vivos trusts are important to families who have substantial assets or who are in the public eye and don’t want everyone knowing what they’re worth.
A grantor may fund inter vivos trusts either during his or her life or after his or her death.
If funded during the grantor’s lifetime, you, the trustee, need to check the instrument carefully to see if the trust falls under the grantor trust rules, or under the intentionally defective grantor trust rules to determine whether to report the income on the grantor’s Form 1040 or on a Form 1041 for the trust. Inter vivos trusts may be revocable or irrevocable; after the grantor’s death, they’re all irrevocable.
A grantor often uses inter vivos trusts to remove property from the estate, at least for probate purposes, and sometimes, for both probate and estate tax purposes. For example, if the trust was treated as a non-grantor or intentionally defective grantor trust during the grantor's lifetime. If, however, the trust was treated as a grantor-type trust during the grantor’s lifetime, be sure to include all property inside the trust.
Trusts created under a last will
Although the idea of a trust for which no probate court supervision is necessary may seem attractive to you, having the court keeping its beady eyes on a rancorous family isn’t always the worst idea. And, in our experience, nothing can turn a family situation uglier in a hurry than the death of a wealthy parent or grandparent.
In cases where a grantor suspects that life may become unpleasant for his or her trustees after his or her death, choosing a testamentary trust, or a trust whose provisions are contained in, and a part of, the decedent’s last will, over an inter vivos trust, can be a wise decision. Testamentary trusts are only funded after the grantor’s death and are therefore always non-grantor-type trusts.
Unlike inter vivos trusts, where accounting standards are sometimes lax, testamentary trusts must usually provide the probate court with an annual account, depending on what state you’re probating the estate in.
Check with the probate court involved to be sure of its requirements because trustees who fail in their duty to prepare and file these annual accounts when required may be sanctioned by the probate court, usually with just a slap on the wrist, but sometimes with a fine or in very rare circumstances a contempt-of-court citation.
Probate accounts are a matter of public record, and anyone with the time and energy to go looking for them, from trust beneficiaries, disinherited heirs, or even newspaper reporters nosing around for some dirt, may access them.