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Trusts & Your Estate Plan
Using Trusts to Meet Your Estate Planning Goals
Trusts can be an important tool in meeting the goals of your estate plan. But knowing the types of trusts that can help you meet your estate planning goals can be difficult. You should work closely with your attorney and tax advisor to determine which trusts are rightfor your situation. A few of the common types of trusts that are used in estate plans are shown below. The chart offers a quick, high-level comparison of how these trusts can help you meet your estate planning goals. Charitable trusts
Credit shelter trusts
Irrevocable life insurance trusts
Revocable living trusts
Irrevocable living trusts
How trusts help meet your estate planning goals
Charitable Trusts
Charitable trusts can help you create a current income stream for yourself, your heirs or a charity as well as help you transfer your wealth to either your heirs or a charity when you die. In addition, transferring your assets to a charitable trust removes them from both your probate estate and your taxable estate.• Charitable lead trust - Current income from the trust is distributed to the charity, usually for a fixed number of years. At that time, your heirs receive the remainder of the trust's assets.
• Charitable remainder trust - You or your beneficiaries receive current income from the trust. At your death (or the end of the trust's term), the charity receives the remainder of the assets held within the trust.
Credit Shelter Trusts
A credit shelter trust enables married couples to use each spouse's applicable exclusion ($2 million in 2006) to protect $4 million from estate taxes. When one spouse dies, a credit shelter trust can be created from his or her estate. The surviving spouse can receive income from the trust and may have access to the principal. When the surviving spouse dies, the assets in the credit shelter trust are distributed to heirs as directed in the trust document. Because he or she would have limited control over the distribution of the trust assets, those assets would not be considered part of his or her taxable estate.Irrevocable Life Insurance Trusts
With an irrevocable life insurance trust, the trust is the owner of the insurance policy, which keeps the proceeds out of your taxable estate. In addition, establishing a gifting program to cover the insurance premiums also helps reduce your taxable estate. When you die, the trust's assets (the insurance proceeds) are distributed to your beneficiaries income-tax-free.Revocable Living Trust
A revocable living trust can be altered at any point during your life. You can change beneficiaries or discontinue the trust at your discretion. However, because you still maintain control of the assets within the trust, it remains part of your taxable estate.Irrevocable Living Trust
An irrevocable living trust is one that cannot be altered once you've established it. In some cases, assets in an irrevocable trust can be removed from your taxable estate. For that to happen, you generally cannot have rights to get the money back or control the trust. Transfers to an irrevocable living trust are usually made by gift. To avoid gift tax, the transfers must be carefully planned to use either annual exclusion gifts or your lifetime gift tax applicable exclusion.How These Trusts Help You Meet Your Estate Planning Goals
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Assets Avoid Probate |
Transfer Wealth to Beneficiaries |
Charitable Giving |
Reduce Estate Taxes |
Charitable remainder trust |
X |
X |
X |
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Charitable lead trust
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X
|
X |
X |
X |
Credit shelter trust
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X |
X |
X |
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Revocable living trust
|
X |
X |
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Irrevocable living trust
|
X |
X |
X |
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| Irrevocable life insurance trust | X |
X |
X |