Common Types of Trusts
Trusts are a common part of estate plans. Trusts come in many different varieties and serve a multitude of purposes. If you think a trust might be a useful tool for transferring wealth and planning for family members and loved ones, read on to learn about several of the more common types of trusts.
Revocable and Irrevocable Trusts
The two basic types of trusts are revocable and irrevocable. A revocable trust 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. On the other hand, an irrevocable trust cannot be amended or revoked. Once a person places assets in an irrevocable trust, the assets no longer belong to that person.
Credit Shelter Trusts
Credit shelter trusts, also referred to as bypass or family trusts, are used to transfer assets while avoiding estate taxes. A person can create a credit shelter trust by including certain provisions in that person’s revocable trust or will that leaves assets (up to the estate tax exemption amount) to the credit shelter trust. Importantly, even if the money in a credit shelter trust grows, it is never subject to estate tax.
Irrevocable Life Insurance Trust
Another common trust is the irrevocable life insurance trust (ILIT). The purpose of the ILIT is to remove the value of your life insurance policy from your taxable estate by transferring the policy to the trust. Upon the death of the insured person, the insurance proceeds in the ILIT can be transferred to beneficiaries immediately to pay for any estate costs. One drawback of 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.