Trusts can be created to be effective during life or only upon death. There are many types of trusts. There are some advantages to choosing a living trust over a last will and testament. Trusts can also be an effective vehicle for tax planning.
There are several types of trusts:
Revocable Trust
Revocable Trusts are typically created to avoid probate process, hold real property located in other states, or for privacy reasons. The creator of the trust (called grantor or settlor) has the right to revoke, amend, terminate or change the trust; in essence, he or she retains all the perks of owning the property. For estate tax purposes, the property of the grantor of the trust is still considered the owner.
Irrevocable Trust
An Irrevocable Trust cannot be amended, terminated, revoked, or changed by the grantor after it has become effective. Because the grantor has given up the right to control the property, generally the trust property is not included in the grantor’s estate at death. High net worth individuals often use Irrevocable Trusts as asset protection to protect their property from creditors.
Other types of Trusts:
Bypass Trust
A Bypass Trust is created in a person’s Will to hold the deceased’s person’s property that will not be subject to estate tax. For example, in 2018, if a person has not used any of this exemption during his lifetime, the Bypass Trust would hold assets worth $10 million. This trust can provide for a surviving spouse and/or children, and at the death of the first spouse, the trust “bypasses” the estate process and is not subject to the estate tax.
Marital Trust
The U.S. now has an unlimited marital deduction, which means anyone can pass as much property as he or she wants to his spouse without paying estate or gift tax. A Marital Trust is created generally at the death of the first spouse. The spouse is the only beneficiary during his or her life, and at the death of the surviving spouse, any assets are included in the spouse’s estate.
Charitable Trust
A charitable trust can create life at death. A person transfers property into a trust, and the trust assets benefit both a charity and named individuals.
Irrevocable Life Insurance Trust (ILIT)
An irrevocable Life Insurance Trust, also known as an ILIT, is created during life typically to hold a life insurance policy. The purpose of an ILIT is to keep the insurance proceeds out of the taxable estate at death and to set guidelines as to how the proceeds will be used.
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