Bypass Trusts. Also called the credit shelter trust, marital trust, and family trust, this trust is designed to help a married couple avoid estate taxes. Each person may pass to heirs a certain amount of money at death with no estate tax. The bypass trust can increase this. Because tax laws vary year to year, contact your estate planning lawyer to make sure you have current information.
Special Needs Trusts. This trust provides financial support to a person who is unable to manage his or her own financial affairs. To avoid the risk of interfering with the support that’s otherwise available from social services, the trustee may not want to use these assets for housing, clothing or food.
Spendthrift Trusts. Instead of leaving an heir a bucket of money that he or she may quickly squander, you place that inheritance into this trust. The trust would then distribute the inheritance to the heir later, perhaps when the heir reaches a certain age, or in the form of an allowance, or for specific expenses, such as college or medical expenses.
Life Insurance Trusts. For high net-worth individuals, owning their own life insurance is a big mistake — because the death benefit is subject to estate taxes. To solve this problem, have a life insurance trust own your policy. Instead of paying for the insurance yourself, you’d give that money to the trust, which would pay the premium for you. The trust would be the beneficiary, and your heirs would be the beneficiaries of the trust. An additional benefit of a life insurance trust: Instead of beneficiaries automatically getting the insurance proceeds immediately upon your death, you can instruct the trust to distribute the money to the heirs more slowly (see Spendthrift Trust above).
Charitable Remainder Trusts. If you plan to donate assets to a charity after your death, you may find it beneficial, instead, to donate to a CRT now. By doing so, you get a tax deduction right now for your gift. You also can name yourself as the income beneficiary (giving yourself an annual income) and the charity gets what’s left after your death, tax free — just as you’ve intended. If you’re concerned that making the gift to the CRT denies your children their inheritance, you can buy a life insurance policy equal to the size of your gift, naming your children as beneficiaries of the insurance, using some of the trust’s income to pay the policy’s premiums (see Insurance Trust above).
QTIP Trusts. Say you die leaving a spouse, minor children and assets. Further, say your spouse remarries, then dies. Result: Your spouse’s new spouse gets all your money, and your children are left with nothing. (We’ve seen this happen too many times.) To avoid this scenario, consider the Qualified Terminal Interest Property Trust. Instead of leaving your assets to your spouse when you die, you leave your assets to the QTIP trust. The trust gives income to your surviving spouse for his or her lifetime. But when your spouse dies, the assets remain in the trust for the benefit of your children. Because your spouse doesn’t directly own the assets, he or she can’t convey them to a new spouse and his or her own heirs.
Living Trusts. This tool is designed to pass your assets to heirs without going through probate. Also, it can help insure that your assets will be used for your benefit and welfare if you become unable to manage your own affairs.
Generation-Skipping Trusts. Such trusts, intended for truly wealthy estates, can preserve your assets for several generations while avoiding estate taxes. You can fund a GST with the same amount as the bypass trust for the benefit of your grandchildren and great grandchildren, and the assets will appreciate free of income and estate taxes. Such assets can also be protected from creditors.