In our most recent post, we gave a brief overview of trusts and why a business owner might need one as part of an estate planning package. In this post, we’ll explain a few other types of trusts, although our list is not all-inclusive. Synergetic Finance founder and author Joseph M. Maas explains trusts in his book, “Exit Insight: ‘Getting to ‘Sold!’” The following is an excerpt from pages 180-182.
Other Types of Trusts
The following is not a full listing of the many trusts available to you, but is intended instead to demonstrate there are myriad choices available to serve your estate according to the strategic plan you and your financial planner have created.
The basic plan is to retain as much of your estate’s value as possible by limiting tax liability, and transferring your estate’s properties efficiently to your beneficiaries. Each person’s circumstances are unique, so the assortment of trusts from which you can choose provides opportunity to protect the wealth you’ve worked so hard to build. Critical to this endeavor is using the trained skills and talents of a professional and independent financial planner who understands your goals and can guide you toward achieving them.
- Irrevocable Life Insurance Trusts: By shifting your life insurance policies into a trust, these policies avoid probate, the proceeds are also kept out of your estate, and you ensure that your beneficiaries have liquidity to help them through the transitional period following your death. In addition, though you lose the capacity to exercise complete control, additional advantages are that the assets cannot be claimed by creditors, you can name your trustee and specify how the policy proceeds are to be invested, and you can also specify the timing of when the trust’s beneficiaries will receive their proceeds.
- Revocable Life Insurance Trusts: While a revocable life insurance trust won’t provide protection from tax liabilities, it does offer other benefits that may be attractive, such as controlling the trust by yourself or through a professional manager; you can make adjustments according to your life’s changing circumstances of birth, death, divorce, and marriage; and among a variety of other details you will discuss with your planner, including both various advantages and disadvantages, you have shielded these assets from probate.
- Bypass Trust: The assets in this trust bypass the surviving spouse’s gross estate, allowing the surviving spouse to potentially receive distributions without triggering tax liabilities, assuming certain parameters are maintained. This trust is best employed with assets that are expected to appreciate in value.
- Marital Trust: A marital trust, known also as an “A” trust, is established for the use of the surviving spouse and the children of the married couple. The marital trust effectuates on the death of the spouse, at which time identified assets are moved into the trust, and income generated by the assets, and sometimes the principal, can be used by the spouse. These assets avoid probate and prevent taxation.Then, upon the death of the surviving spouse, the marital trust can be used with a credit shelter trust, also known as a “B” trust and a bypass trust. The purpose of a B trust is to assure that the assets go to the married couple’s children, not to the new children of the surviving spouse if there is a remarriage with children.
- The A – B Trust: Also known as a ‘credit shelter trust, or CST, the A – B trust is the name given when the two trusts described above are used to work together. In further explanation, assets are transferred to the beneficiaries, normally the couple’s children, but the surviving spouse retains rights to the assets and the generated income for the rest of their life.
- The Qualified Terminable Interest Property (QTIP) Trust: This trust provides income and sometimes the principal for the use of the surviving spouse, and then for the allocation of the assets after the surviving spouse has died.
- Trusts to Provide for a Dependent with a Disability: In this case, any of several different types of trusts can be established to benefit an individual with a disability, providing supplemental resources for this person’s well-being without jeopardizing the ability to also receive the assistance of public funds. Supplementation may be for additional nursing care, public housing cost differentials, travel expenses for visits by the family to the individual, and any expenditures which benefit the individual without disqualifying the person from any public assistance program.
- Trusts for Minors: As you might imagine, there are also a variety of trusts available for minors.There is the ‘discretionary trust’, also known as the ‘minor’s trust’ which permits tax deductible financial gifts to a minor until they turn 21; it is defined by the Internal Revenue Code, Section 2503(c).
The ‘mandatory income trust’ or ‘income trust’ provides an annual income for a minor’s care and welfare. The income is taxable, but the donor may avoid taxes depending on their meeting the annual gift tax exclusion requirements. This trust is defined by the Internal Revenue Code, Section 2503(b).
The ‘Crummey trust’, named after the first person to use it, provides that the beneficiary has a set time, usually 30 days, to use the newest deposit to the trust; if the newest contribution goes unused, those funds are then added to the inaccessible portion of the trust and released later according to the terms of the trust. This is a ‘use it or save it’ trust.
It’s easy to see there are a variety of trusts available for a variety of purposes, and many more than are mentioned here. As always, it’s important to remember that you don’t know what you don’t know, so it’s the wise person who seeks the counsel of trained professionals who can then provide guidance on the array of choices, and work with you to select the best path to achieve your goals and satisfaction.
Copyright © Joseph M. Maas for Merrell Publishing 2014-2015
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