Many people see trusts as confusing and even intimidating documents. There are many different types of trusts and each one has a different purpose and its own set of terminology. However, trusts have an elegant simplicity, and we genuinely enjoy teaching our clients about the various types of trusts and how they can accommodate their goals, especially as they relate to estate planning.
A trust is basically an arrangement whereby one person agrees to hold property for the benefit of another. Trusts can be used to hold money for minors, forestall spendthrift family members, benefit a charity of choice, protect assets from former spouses or creditors, avoid probate and reduce estate taxes upon the trustmaker’s death, and even make provisions to care for pets.
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Below are three common types of trusts (there are dozens more):
Life insurance trusts. An irrevocable life insurance trust lets you keep the death benefit of your life insurance policy outside of your estate (and out of probate), which means your life insurance proceeds will not increase your estate tax liability. In fact, you can design your life insurance trust to be applied toward your estate tax liability, leaving more of your actual wealth for your heirs.
Irrevocable gift trusts. You can give beneficiaries access to gifted funds according to the standards you set. For example, you can decide at what future time or age a beneficiary will receive your gift. These trusts can even continue for multiple generations if that better accommodates your goals.
Revocable living trusts. Although revocable living trusts are still part of your taxable estate, they do help you efficiently transfer wealth to your heirs and help them avoid the probate process.