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Types of Trusts

Trusts can protect you and your beneficiaries from many of the costs, difficulties and delays associated with estate settlement. You may use a trust to determine how your assets will be used and/or distributed to your heirs and to ensure your estate is managed according to your wishes in case of incapacity or death.

The two most frequently used types of personal trusts are the Living Trust and the Testamentary Trust. A Living Trust goes into effect during your lifetime, while a Testamentary Trust is part of a Will and goes into effect at your death.

Living Trusts

A Revocable Living Trust can be amended or terminated by the grantor at any time. At your death it can provide for distributions of assets to your heirs while avoiding probate. It can minimize estate settlement-related fees and taxes and is most widely used for asset management continuation in the event of death, incompetence, or disability. It is also a favorite of those who own real estate in multiple states because it is "probate-friendly". However, because the property remains in your control, it is subject to estate taxes. There are provisions that can help minimize these estate taxes if you meet certain requirements.

An Irrevocable Living Trust provides the same ability to avoid probate as a Revocable Trust and also has the potential for additional estate tax savings. It also offers credit protection for beneficiaries. Once property is transferred to this trust, future appreciation of that property is not included as part of your estate assets. Essentially, the content of an irrevocable trust cannot be altered.

Testamentary Trusts

A Testamentary Trust goes into effect at your death. The provisions of the trust are incorporated in your Will and accompany your Will through the probate procedure. This trust is frequently used when a person does not want to change asset registration or otherwise fund a trust during his or her lifetime, but realizes the need to provide for their beneficiaries after death. A testamentary trust can help you control asset distribution at your death or continue management and distribution of assets for a period of time after your death.

Other Types of Trusts

Bypass Trust or Credit Shelter Trust

This trust can reduce or eliminate federal estate taxes by maximizing the unlimited marital deduction and Unified Estate and Gift Tax Credit to "bypass" your spouse's estate, while still allowing your spouse to receive income from the trust.

Irrevocable Life Insurance Trusts

An irrevocable life insurance trust can be used to buy and hold insurance policies and keep proceeds from those policies out of your taxable estate, subject to certain "look-back" periods.

Generation-Skipping Trusts

These trusts transfer property to second-generation beneficiaries (usually grandchildren), without the proceeds from the trust actually becoming a part of the first-generation's (children's) estates.

Charitable Annuity Trust or Unitrust

This trust enables you to donate to an irrevocable trust and retain the income during your lifetime. After the death of the income beneficiary the assets will be transferred to your designated charity. Gifts to charitable trusts receive an income tax deduction and avoid estate taxes.

Other Products

Guardianships

Guardianships are court supervised proceedings for minors and for incapacitated adults. Subject to court authorization and review, a guardian manages the assets of the minor or incapacitated person. Generally, they require greater lawyer and court involvement. There are annual accountings and there are bonds. There are also restrictions on how the money may be spent as well as how it can be invested.

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