There are a myriad of trusts available, and their varying uses and benefits can make creating the right estate plan can seem daunting. However, that is what we, as estate planning attorneys, do every day. We know that laws and can design the right plan to address your specific situation.
Here is an overview of the basic functions of ten common trusts available to you during your estate planning process. When we meet, all you need to do is share your goals and insights into your family and finances. From there, we will design your estate plan and incorporate the best documents for your situation.
1. Bypass Trust
Bypass trusts are commonly referred to as a credit shelter trust, family trust, or B trust. A bypass trust contains a portion of a deceased spouse’s accounts and property and uses the deceased spouse’s lifetime exclusion amount to reduce or eliminate estate tax. The estate tax is calculated at the first spouse’s death, and this type of trust is bypassed for estate tax purposes at the second spouse’s death.
2. Charitable Lead Trust
A charitable lead trust provides a stream of income to a charity of your choice for a fixed period of time or your lifetime. Either at the completion of the fixed time period, or your death, whatever is left in the trust goes to you or your loved ones with significant tax savings.
3. Charitable Remainder Trust
A charitable remainder trust is a trust which provides a stream of income to you for a period of years or a lifetime and then gives the remainder to the charity of your choice with significant tax savings once the period of years or death has occurred.
4. Special Needs Trust/Supplemental Needs Trust
This type of trust allows individuals to provide money or property for the benefit of someone with special needs without disqualifying them from receiving governmental benefits. Federal laws allow special needs beneficiaries to receive certain types of benefits from a carefully crafted trust without defeating eligibility for government benefits.
5. Generation-Skipping Trust
A generation-skipping trust uses your lifetime exemption to offset taxes that would otherwise be due. This trust is often used you to distribute your money and property to grandchildren, or even to later generations, without taxation.
6. Grantor Retained Annuity Trust (GRAT)
GRATs are a type of irrevocable trust which provide you with an annuity for a specific amount of time based on the value of the property held by the trust. Upon completion of the annuity period, the remaining money and property is transferred to those you have named. This type of trust is used to make large financial gifts to your loved ones of accounts or property that are expected to grow in value at a higher rate than the annuity rate being paid back to you.
7. Irrevocable Life Insurance Trust
Irrevocable life insurance trusts are designed to own high-value life insurance and receive the payment of the death benefit upon the grantor’s death. The benefit of this type of trust is that the life insurance proceeds are excluded from the deceased’s estate for tax purposes. However, the proceeds are still available to provide liquidity to pay taxes, equalize inheritances, fund buy-sell agreements, or provide an inheritance.
8. Marital Trust
A marital trust is designed to protect the accounts and property for the surviving spouse’s benefit, as well as qualify for the unlimited marital deduction. These accounts and pieces of property are excluded from estate tax at the first spouse’s death. However, they will still be included in his or her estate for tax purposes.
9. Qualified Terminable Interest Property Trust
These trusts provide income to the surviving spouse and, upon the surviving spouse’s death, the remaining money and property are distributed to other named beneficiaries. However, the trust still qualifies for the unlimited marital deduction. They are commonly used in second marriage situations or to maximize tax planning flexibility and both estate and generation-skipping tax exemptions.
10. Testamentary Trust
Testamentary trusts are created within a will and will be established upon the grantor’s death. They are commonly used to protect the money and property on behalf of a beneficiary instead of transferring money and property to the beneficiary outright. It can be used when a beneficiary is too young to manage their own money or property, has medical or drug issues, or may be incapable of responsibly managing their own money. They can also provide asset protection from lawsuits, or claims by a divorcing spouse brought against the beneficiary. However, testamentary trusts require the sometimes lengthy and expensive probate process before the trust is created.
There are many types of trusts available. Our firm can help you select which trusts, if any, are a good fit for you. Call today to schedule your in-person or virtual appointment. We are waiting to hear from you.
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Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.