Understanding the various types of trusts and the advantages and disadvantages of each can help people determine which ones might meet their goals while they are living and after they have passed away.
Also known as family or bypass trusts, credit-shelter trusts entail writing a will that bequeaths a specific amount to the trust, up to the estate-tax exemption. Individuals can pass the rest of their estate tax-free to their spouses or family members. The trustor can also specify how the trust should be used, such as dictating that once the spouse who received the trust dies, their children should receive the principal.
Qualified Personal Residence Trusts
Qualified personal residence trusts (QPRTs) can exclude the value of a home or vacation home from the estate This may be ideal if the home is likely to experience an increase in value. Individuals can gift their homes, often to their children, while retaining control of the property for a set period of time.
These trusts allow individuals to transfer large amounts of money tax-free to designated beneficiaries of at least two generations their junior, which are oftentimes grandchildren.
Trustors can also specify that their children may receive income via the trust and use it toward supporting their grandchildren. However, if the transferred amount exceeds the exemption amount, a generation-skipping transfer tax will be applied.
Qualified Terminable Interest Property Trusts
If someone is a part of a family that has gone through divorces, with remarriages and stepchildren involved, he or she can direct assets to designated relatives using a qualified terminable interest property trust.
Surviving spouses can receive income from the trust, with specified beneficiaries receiving the remaining amount following the spouse’s death. This helps ensure that estate passes to the individual’s own children rather than another’s.
Irrevocable Life Insurance Trust
Irrevocable life insurance trusts can remove life insurance from taxable types of estate, assist with paying the costs of the estate, and provide next of kin with cash. While removing the policy from an estate entails surrendering ownership rights, the proceeds from the policy can go toward paying estate costs and provide recipients with tax-free income.
A trust attorney will evaluate the challenges a trustor might face as well as his or her goals for the future when determining which types of trusts to consider.