Paralegal Advanced Competency Exam (PACE) Practice Exam

What type of trust is established while the settlor is alive?

1. Testamentary trust

2. Living trust

3. Irrevocable trust

4. Blind trust

The correct answer is: Living trust

A living trust, also known as an inter vivos trust, is established during the lifetime of the settlor, the person who creates the trust. This type of trust allows the settlor to manage and control their assets while they are alive, often providing a way to seamlessly pass on assets to beneficiaries upon their death without the need for probate. Living trusts can be revocable, allowing the settlor to retain the ability to modify or revoke the trust at any point during their life, or they can be irrevocable, meaning once established, the terms cannot be changed by the settlor. In contrast, a testamentary trust is created through a will and comes into effect only upon the death of the settlor, which is why it does not fulfill the requirement of being established during the settlor's lifetime. An irrevocable trust, while it can be a living trust, specifically refers to a trust that cannot be altered after its creation, thus limiting the settlor's control over the assets. A blind trust is a specific type of trust designed to manage assets without the settlor's knowledge of the trust's holdings or activities, often used to avoid conflicts of interest, but it too must be established while the settlor is alive to function correctly.