Tuesday
Dec222009

Trust Types and Benefits

The following kinds of trusts are commonly used in estate planning. These are only a few of the many types of trusts available:

1. Revocable Living Trust ‑ This trust is established by a written declaration of trust or written trust agreement during the lifetime of the settlor ("grantor" or "trustor"). The terms and conditions of the trust can be changed at any time during the lifetime of the settler. The trustee protects and manages trust assets of the settlor in the event of the settlor's incapacity. The trust becomes irrevocable upon the death of the settlor and provides for swift and efficient asset distribution outside of usual probate proceedings. It is totally private.

2. Irrevocable Living Trust ‑ Created by a written declaration or agreement during the lifetime of the settlor, this form of trust may be used to make gifts to avoid taxation or capital gains, to reduce estate taxes, and to obtain special benefits such as Medicaid. There are many kinds of such trusts. Most eliminate probate consideration. All are private.

3. Special Needs Trust - This type of trust can be created by Will or by a special instrument during the lifetime of the settlor. It serves many useful purposes, including the preservation of assets for the benefit of a disabled or vulnerable child or adult, protection of persons with substance abuse or other drug-related problems, preservation and continuance of government benefits such as SSI, Medicaid, etc., and the assuring that these valuable and vital benefits are not lost due to inheritance from well-intentioned but unknowing loved ones.

3. Credit Shelter or By‑Pass Trust ‑ Created by written trust agreement, declaration or under the express terms in a Will, this type of trust becomes effective upon death of the first spouse. An amount up to the then‑applicable Unified Credit (from $2 million to $3.5 million or more) is maintained in the estate of the first spouse to die for the benefit of the surviving spouse and specified heirs, who receive their ultimate inheritance wholly free of the estate taxes (which may otherwise result in the loss of more than half of an estate's value).

4. Life Insurance Trust ‑ The trust becomes the owner of polic(ies) of life insurance usually insuring the life of the settlor. The proceeds of the polic(ies) are distributed as per the instructions of the settlor. The trust keeps the proceeds of the insurance out of the settlor's taxable estate, greatly increases liquidity, and can greatly increase the magnitude of a non‑taxable estate.

5. Charitable Remainder Trust ‑ This type of trust holds highly appreciated property for the benefit of a charitable organization. The trust pays annuity or income payments to specified beneficiaries during their lifetimes, and may include the settlor, his or her spouse, children, grandchildren and other designated persons. Upon the deaths of all specified beneficiaries, the trust pays the remainder over to the designated charity. The settlor is entitled to an immediate and continuing income‑tax deduction. Capital gains taxes may be wholly avoided on highly appreciated assets, and the property is wholly excluded from the settlor's taxable estate.

6. QTIP (Qualified Terminal Interest Property) Trust ‑ This type of trust may be created during the settlor's lifetime or by Will and becomes effective upon the death of the settlor. The beneficiaries are usually the settlor's spouse and children. The assets in this trust qualify for the unlimited marital estate‑tax deduction. The settlor has complete control over the disposition of the assets after death. This trust is often used in second marriage situations to protect the interests of children of the first marriage.