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People often use trusts as part of an estate plan. These arrangements can reduce your estate taxes and offer additional benefits that you do not get with a simple will. Many types of trusts usually do not go through probate, so your beneficiaries might get to access the assets more quickly than they could through a will.
When you set up a trust, a third party, called the trustee, holds the assets as a fiduciary for the people you designate as beneficiaries. Because trusts are usually not filed with the court, the terms of your trust remain private. When a will goes through the probate court, it becomes public record. A Texas wills and trusts lawyer can help identify when a trust is right for you.
Common Types of Trusts
There are many different kinds of trusts. The best type of trust for you will depend on the facts of your situation and what you are trying to accomplish through the arrangement. Here are nine common kinds of trusts:
- “A” trust, also called a marital trust: the surviving spouse receives the assets, which usually get included in the taxable estate of that spouse.
- “B” trust, also called a bypass trust or credit shelter trust: these trusts attempt to fully utilize the federal estate tax exemption for both spouses by bypassing the surviving spouse’s estate.
- Testamentary trust: these trusts usually do not exist until after the person dies. The typical situation is that the decedent’s will contains language that creates a trust arrangement. The assets will have to go through probate and be subject to transfer taxes. The probate court usually supervises the trust until it reaches fulfillment, for example, when a minor child who is a beneficiary turns 18.
- Generation-skipping trusts. These arrangements do not distribute the assets to the surviving spouse or the children. Instead, the assets go to the grandchildren or later generations. The purpose of these trusts is to use the generation-skipping tax exemption and avoid estate taxes.
- Charitable remainder trusts: allow the person who set up the trust to collect a stream of income for a designated length of time. After that time, whatever assets remain will go to a named charity.
- Charitable lead trusts are the flipside of charitable remainder trusts. With charitable lead trusts, a charity will receive the benefits you designate, and whatever is left will go to your beneficiaries.
- Irrevocable life insurance trust (ILIT) keeps life insurance proceeds from having to go through probate and count as part of the decedent’s taxable estate. These trusts provide quick assets for the estate or the beneficiaries, or both.
- Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that suspends the appreciation on assets that are appreciating rapidly. The person who sets up the trust gifts assets to the trust, and the appreciation shifts to the next generation.
- Qualified Terminable Interest Property (QTIP) trusts are often used to provide for the surviving spouse in a second marriage or to achieve the maximum tax benefits. A QTIP trust will provide a stream of income for the surviving spouse, but the assets will not go into the surviving spouse’s estate upon death. Instead, when the surviving spouse dies, the assets will pass to the beneficiaries the original spouse designated when setting up the QTIP trust.
A Texas wills and trust attorney can explain which types of trusts could best suit your estate planning needs. Contact the Law Office of Carey Thompson today to discuss your personal estate-planning needs.