As the Baby Boomers begin to enter their golden years, there is a mini-explosion of interest in creating trusts as part of smart estate planning. But what kind of trust it right for your specific situation?
The answer is it depends on your specific situation so you should consult your attorney and financial adviser. But, in general, you should be familiar with the general types of trusts that can be created. The following information should help:
There are two basic types of trusts: living trusts and testamentary trusts. A living trust or an “inter-vivos” trust is set up during the person’s lifetime. A Testamentary trust is set up in a will and established only after the person’s death when the will goes into effect.
Living trusts can be either “revocable” or “irrevocable.”
Revocable trusts allow you to retain control of all the assets in the trust, and you are free to revoke or change the terms of the trust at any time.
With irrevocable trusts, the assets in it are no longer yours, and typically you can’t make changes without the beneficiary’s consent. But the appreciated assets in the irrevocable trust are NOT subject to estate taxes.
Within these two broad categories, there are many more complicated types of trusts, too, that apply to specific situations. Here are just a few:
Bypass trusts: These irrevocable trusts that are structured so the children will not have to pay estate taxes on those assets in excess of the current estate tax exemption.
Generation-skipping trusts: A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior – typically your grandchildren.
Qualified personal residence trusts: A qualified personal residence trust can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.
Irrevocable life insurance trusts: An irrevocable life insurance trust can remove your life insurance from your taxable estate, help pay estate costs, after you die and provide your beneficiaries with tax-free income.