Considering the myriad of trusts available, creating the right estate plan can seem daunting. However, understanding the differences and when to use each type is what estate planning attorneys do every day. Here is a quick look at the basics of ten common trusts to provide you with a general understanding of some of the options available.
- Bypass Trust. Commonly referred to as a credit shelter trust, family trust, or B trust, a bypass trust is often a sub-trust within a revocable living trust that comes into existence at the death of the first spouse. The bypass trust is designed to contain a portion of a deceased spouse’s accounts and property and uses the deceased spouse’s lifetime exclusion amount to reduce or eliminate estate tax. Because the estate tax is calculated at the first spouse’s death and the assets pass outside the estate of the surviving spouse, this trust is bypassed for estate tax purposes at the second spouse’s death.
- Charitable Lead Trust. A charitable lead trust is a trust which provides a stream of income to a charity of your choice for a period of years or a lifetime. At the completion of the period of years, or at death, whatever is left goes to you or your loved ones with significant tax savings.
- Charitable Remainder Trust. A charitable remainder trust is a trust which provides a stream of income to you for a period of years or a lifetime and then gives the remainder to the charity of your choice with potentially significant tax savings for contributions of highly appreciated assets with a low tax basis or people in high tax brackets.
- Special Needs Trust. A special needs trust allows you to provide money or property for the benefit of someone with special needs without disqualifying them from receiving governmental benefits. Federal laws allow special needs beneficiaries to receive certain types of benefits from a carefully crafted trust without defeating eligibility for government benefits.
- Generation-Skipping Trust. A generation-skipping trusts allows you to distribute your money and property directly to your grandchildren, or even to later generations, without taxation, by using your lifetime GST tax exemption to offset any tax that could be due.
- Grantor Retained Annuity Trust. A grantor retained annuity trust is an irrevocable trust which provides you with an annuity for a specific amount of time based on the value of the property in the trust. Upon completion of the annuity period, the remaining money and property is transferred to those you have named. This type of trust is used to make large financial gifts to your loved ones of accounts or property that are expected to grow in value at a higher rate than the annuity rate being paid back to you.
- Irrevocable Life Insurance Trust. An irrevocable life insurance trust is designed to own high-value life insurance and receive the payment of the death benefit upon the trustmaker’s death. The benefit of this type of trust is that the life insurance proceeds are excluded from the deceased person’s estate for tax purposes. However, the proceeds are still available to provide liquidity to pay taxes, equalize inheritances, fund buy-sell agreements, or provide an inheritance.
- Marital Trust. A marital trust is designed to protect the accounts and property for a surviving spouse’s benefit, as well as qualify for the unlimited marital deduction. These accounts and pieces of property are excluded from estate tax at the first spouse’s death but are included in his or her estate for tax purposes. Because the assets are still included in the surviving spouse’s estate, the assets will typically receive a second step-up in tax basis at the death of the surviving spouse.
- Qualified Terminable Interest Property Trust. A qualified terminable interest property trust initially provides income to the surviving spouse and, upon the surviving spouse’s death, the remaining money and property are distributed to other named beneficiaries. Because of the design of the trust, assets passed to it will still qualify for the unlimited marital deduction at the death of the first spouse. These are commonly used in second marriage situations or where remarriage is potentially anticipated following the death of one spouse, as well as to maximize estate and generation-skipping tax exemptions and tax planning flexibility.
- Testamentary Trust. A testamentary trust is a trust created in a will. This type of trust is created upon the individual’s death and is commonly used to protect the money and property on behalf of a beneficiary as opposed to transferring the money and property to the beneficiary outright. It can be used when a beneficiary is too young to manage their own money or property, has medical or drug issues, or may be incapable of responsibly managing their own money. The trust can also provide asset protection from lawsuits, or a claim by a divorcing spouse brought against the beneficiary. Unlike a revocable living trust or an irrevocable trust where property should be transferred into a trust during the trustmaker’s lifetime in order to avoid probate and track the intent of the estate plan, testamentary trusts require the sometimes lengthy and expensive probate process before the trust is created.
These are just a sampling of the different trusts that could be used to advance your estate plan. Speak with an estate planning attorney about how one or more types of trust may be advantageous to you and your family.
