|
There are several kinds of trusts
depending on the type of beneficiaries,
the purpose of the trust, what assets
are in the trust, how much power the
trustee and beneficiaries have over
the use of the trust’s assets and how
much control the grantor has over the trust.
The most common distinction is
between a testamentary trust and
a living trust.
A testamentary trust, which
may be created by a will, takes
effect only when the grantor dies
and the estate is probated.
A change to a testamentary trust
may require a change to the will.
A living, or inter vivos, trust
takes effect during your lifetime. Living trusts
may be either revocable, meaning the grantor can
change or end them at any time, or irrevocable,
meaning the trust cannot be changed once it
is established or once a certain event
occurs (for example, the death of a
named person).
Bypass Trust (also called Credit
Shelter Trust, Family Trust or Credit
Equivalent Bypass Trust): This type
of trust takes advantage of federal estate
tax law to reduce or eliminate federal
estate taxes. It uses a provision of
the federal estate tax law, called the
unlimited marital deduction, which allows
you to leave an unlimited amount of
property to your spouse free of federal
estate tax. However, certain assets
which remain in the surviving spouse’s
estate will be subject to tax upon
the surviving spouse’s death. This
type of trust will ensure that the
applicable exclusion amount is used
by the descendent.
Qualified Terminable Interest
Property Trust (QTIP Trust): This
type of trust can help ensure that, after
your death, children from a prior marriage
are not disinherited by a subsequent spouse;
it can protect your estate in the event
your spouse remarries. The grantor places
the property in a QTIP trust which still
qualifies for the marital deduction. When
the grantor dies, the surviving spouse
does not inherit the property but receives
income from the trust at least annually.
At the surviving spouse’s death, the value
of any assets remaining in the trust are
taxed in that individual’s estate. Then the
assets are distributed to the beneficiaries
named in the trust, usually children from
the grantor’s previous marriage.
Revocable Living Trust: A revocable
living trust is often touted as an
alternative to a will because a trust
usually avoids probate. Probate, the
legal validation of your will and your
assets, can be a lengthy and expensive
process depending on the applicable
state law and your situation. However,
you should not use a trust as a sole
substitute for a will.
An important reason to use a
revocable living trust is to manage
your assets if you are disabled. This
type of trust can be created with
yourself as trustee and another
individual and/or institution named
as successor trustee. You have complete
control over the assets in the trust
until you become disabled or
incapacitated. At that point,
the trust becomes irrevocable and
your successor trustee takes over
using proceeds from the trust for
your care and distributing the assets
after your death as you directed in
the trust agreement. The trust
should include a definition of
disability or incompetence, such
as opinions by two or more physicians.
In addition, a living trust could be
accompanied by a “pour-over” will,
which directs any assets not held in
the trust be added to it at your death.
Remember that assets held in a revocable
living trust are considered part of
your gross estate.
|
Advantages To A Living Trust
|
- It can be more comprehensive than
a power of attorney naming someone to
act on your behalf should you become
incapacitated.
- It will generally be universally
accepted at financial institutions,
whereas the power of attorney may not.
- You can specify in the trust
how and where you wish to be cared for
and give specific investment instructions
to your trustee. If you become
incapacitated without a living
trust or durable power of attorney,
a court must appoint a conservator or
guardian for you — someone you may or
may not want to manage your affairs.
- A trust may also be more readily
accepted as expressing your wishes —
and therefore less subject to
challenges — than the actions of a
court-appointed guardian or someone
acting under your durable power of
attorney.
- If you own property in more
than one state, a living trust can
transfer property directly to your
heirs without the expense and delay
of multiple probates.
- A living trust can help keep
private the details of your
estate. It does not usually
become part of the public
record as a probated will does.
|
Grantor-Retained Income Trust (GRIT):
This irrevocable living trust is
designed to reduce gift taxes and
remove highly valued assets from
your taxable estate. You receive
income from assets placed in the
trust for a set period; at the end
of the term, the assets pass to
your heirs. Assets placed in the
trust may be your personal residence
or income-producing assets.
To benefit from this type of
trust, you must live past the
term of the trust so that the
assets are given to the named
beneficiaries and removed from
your taxable estate.
Spendthrift Trust
(also called a Minor’s Trust):
This type of trust is used if you are
concerned your heirs will not be able
to manage the estate, either because
they are too young or irresponsible.
The trust can specify the investment
objectives that the trustee must follow.
The guidelines for distribution are
also established.
Life Insurance Trust: If
you are the owner of life insurance
on your own life, proceeds from a
life insurance policy will generally
be included in your taxable estate.
If your estate value is more than
the current maximum exclusion amount,
a life insurance trust often makes
sense. An irrevocable living trust
is established to own a policy on
the grantor’s life and the trust
is also named beneficiary of the
policy. At the grantor’s death,
the trustee can use the policy
proceeds to provide for the
beneficiaries, usually the grantor’s
survivors. For large estates, a
life insurance trust funded with
a policy in the expected amount
of the tax obligation can provide
the funds to pay estate taxes.
However, a life insurance transfer
from you to the trust must be made
at least 3 years before your death.
Otherwise, the trust proceeds will
be included in your taxable estate.
To prevent potential problems
resulting from the 3-year rule,
a new policy can generally be
issued with either the trust or
your spouse as owner.
Other Trusts
Generation-Skipping Trust transfers
property to second-generation beneficiaries,
usually grandchildren, without the trust
proceeds becoming part of your children’s
estates (Generation-Skipping transfer taxes
may apply). Qualified Domestic Trust (QDOT)
is for spouses who are not U.S. citizens.
QDOT helps these spouses gain the benefits
of deferring the marital deduction.
Charitable Remainder Trust lets you give
an asset, generally one with a low-cost
basis, to a charity but generates income
from the asset. Charitable Lead Trust
provides income from an asset to a
charity, while you reclaim the principal
at the end of a set period of time.
|