Earlier in the year I wrote a blog post with reasons why you should have a trust instead of a will. Now, I’m going to dive a little deeper into the different types of trusts and discuss the reasons why you might want to choose one that you might not be too familiar with.
As you probably know, the basic two types of trusts are living trusts and testamentary trusts. Living trusts are set up during the individual’s lifetime, while a testamentary trust is set up only after an individual’s death, when their will goes into effect.
For the purposes of my post today, we will be discussing the more complicated types of trusts that apply to specific situations. My goal here is to inform you of some different types of trusts that you may not know about, so if you are looking to set up a trust, you can choose the one best suited for your needs and goals.
Credit shelter trusts: A credit shelter trust is also sometimes called a bypass or family trust. It’s an irrevocable trust established after the death of a married spouse, to benefit the surviving spouse.
The main purpose of this trust is to limit estate taxes. If you have a multimillion dollar estate, this might be a trust that interests you. Assets specified in the trust agreement are transferred to the individual’s beneficiaries (usually the couple’s children) without estate taxes being levied when the surviving spouse passes away.
A key benefit to a credit shelter trust is that the surviving spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime.
Generation-skipping trusts: This type of trust is also called a dynasty trust. It allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior – so this would typically your grandchildren and great-grandchildren.
Qualified personal residence trusts: This special type of irrevocable trust is created to remove the value of your primary residence or second home from your taxable estate. It can be particularly useful in situations where the home is likely to appreciate in value.
Irrevocable life insurance trusts: This trust is also sometimes referred to as an ILIT or a wealth replacement trust. This trust basically owns your life insurance policies for you, so you personally don’t own the life insurance and it won’t be included in your estate, thereby reducing your estate taxes. The caveat here is if you die within 3 years of the date of transfer to the trust, the trust is considered invalid and the life insurance will be included in your taxable estate.
Qualified terminable interest property trusts: You’ll probably hear this trust referred to as a QTIP. It’s particularly useful for individuals who have been divorced, remarried, or have stepchildren or other family members that you want to direct assets to.
Your surviving spouse receives income from the trust, but as an example, your children from a prior marriage will receive the principal or remainder of the trust after your surviving spouse dies.
It’s important to note again that these are very specialized types of trusts that do not apply to everyone. You should consult with an estate attorney and your finance and legal team to understand whether one of these trusts is right for your individual situation. As always, feel free to contact me if you have any questions.
