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Different Trusts for Different Purposes: Part One

Trusts are a common and popular part of many estate plans. However, despite the commonplace of trusts some people do not understand how some of these trusts work and therefore feel they do not have a need for one. Trusts come in many different varieties and serve many different purposes. Below are several common types of trusts:

Revocable Trust

A revocable trust is probably the most common type of trust. It allows the trust creator to maintain control of all trust assets. After establishing a revocable trust, the trust creator can amend or revoke the trust at any time. Since the trust creator can amend or revoke the trust at any time, he or she is considered to still own property placed in a revocable trust for tax purposes. This means that the property in the revocable trust is still subject to estate taxes.

Purpose: Avoidance of Probate, Privacy, Asset Management

Irrevocable Trust

Another basic type of trust is an irrevocable trust. An irrevocable trust cannot be amended or revoked. Once a person places assets in an irrevocable trust, the assets no longer belong to him or her. Property placed in an irrevocable trust is no longer considered part of the estate of the trust creator.

Purpose: Minimize Taxes, Creditor Protection

Credit Shelter Trust

Credit shelter trusts, which may also be referred to as bypass trusts or family trusts, are employed for the purpose of transferring assets while avoiding estate taxes. The trust creator will have the documents drafted to create the trust, and then include a provision in his or her will that leaves assets up to the estate tax exemption to the trust. Even if the money in a credit shelter trust appreciates, it is never subject to estate tax.

Purpose: Save Estate Taxes (Federal and State), Asset Management, Creditor Protection

Irrevocable Life Insurance Trust

Another common trust is the irrevocable life insurance trust, which is commonly referred to as an “ILIT”. The ILIT is a type of irrevocable trust that is specifically designed to hold and own life insurance policies. The main purpose of the ILIT is to remove the value of your life insurance policy from your taxable estate. The assets in ILITs can be transferred to beneficiaries immediately in order to pay for any estate costs. One drawback to the ILIT is that, once you have transferred your life insurance policy into it, you cannot borrow against the policy or change your named beneficiary. In addition, you cannot be a Trustee of an ILIT, otherwise you will be deemed to have incidents of ownership of the life insurance and thus defeat the purpose of the trust.

Purpose: Save Estate Taxes (Federal and State), Asset Management, Creditor Protection

Note: This is the first part of a three part series on Trusts.

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