What are the differences between an active trust, standby trust, insurance trust, and testamentary trust?
Trusts can be classified into 2 types based on when they are established:
- Living trust (or inter vivos trust) is established during the lifetime of the settlor by immediately funding the trust with some assets. A trust deed is usually executed to govern the trust.
- Testamentary trust (or Will trust) is established only upon death of the testator and funded by the testator's assets only upon death due to what is written in the deceased's valid Will. The valid Will governs the trust and it cannot be funded while the testator is alive since a Will only takes effect upon death. The trust does not exist while the testator is alive so nothing can be transferred into it.
💡Settlor is the person who establishes the trust by transferring assets into it. This is the person who wants to create a trust.
💡Testator is the person who made a Will. In the case of a testamentary trust, the testator is also the settlor because the trust is established based on the testator's Will and funded with the testator's assets after their death.
💡Trust Property refers to the assets that were already transferred into the trust.
"Flavours" of Living Trust
The following are just different ways to label a living trust based on how fully it is funded or by what is used to primarily fund it:
A standby trust is a trust that is already established but holds minimal Trust Property until more assets are transferred into it, either through a Will, a Lasting Power of Attorney, or active funding by the settlor.
An active trust is a trust that is already established and currently holds some or all of the Trust Property, which is managed by the trustee. The trust can be further funded subsequently, through a Will, a Lasting Power of Attorney, or active funding by the settlor.
An insurance trust is typically a type of active or standby trust funded solely by insurance policies. Trust companies generally charge less for them as compared to an active or standby trust that holds a variety of assets.
There are of course more ways to describe a trust e.g. bare, revocable, discretionary, etc. but these are just descriptive labels. You should ultimately check on the terms of the trust, e.g. in the trust deed, to understand what are the exact specific terms described in full details.
Why you may want to consider a Living Trust over Testamentary Trust
In contrast to testamentary trust, living trusts have the advantage of being more flexible as they are already established, allowing funds to be transferred into the trust while alive including during non-death situations (e.g., if the settlor is in a coma). This means it can also served you well while you are alive but encounter unfortunate circumstances such as permanently disability or loses mental incapacity.
In addition, assets already transferred into the established living trust falls outside of your estate and therefore can be protected from creditors (depending on the terms of the trust). This added benefit of asset protection is important to preserve wealth especially for individual exposed to creditor risk such as business owners. Being out of your estate also mean it will bypass probate, thereby avoiding any delays, disputes, or risks associated with going through probate.
How can I do up one?
You can draft a Will, including testamentary trust, on our platform. For assets given to minor beneficiaries, you can quickly indicate who to hold on trust and manage them i.e. the Executor, Guardian, or someone else. For more elaborated configurations of testamentary trust, you can also refer to some of our common testamentary trust examples.
To establish a living trust, you can engage a licensed trust company. You can reach out to our partner Kensington Trust using the "Professional Services" button to send them a request for their representative to follow up.