Trust are legal documents drawn up during the lifetime of a person that states how the person’s assets and liabilities will be managed after death. Different forms of trusts can be created to serve various purposes; however, there are two basic kinds of trusts: revocable and irrevocable.
Revocable trusts are those which can be modified, amended, and revoked altogether. Irrevocable trusts are just the opposite.
Here is a listicle of some kinds of trusts that you should know about:
#1 Spendthrift Trust
When a beneficiary is unable to manage money and take responsible financial decisions, a spendthrift trust is created. In this, a trustee is appointed who manages the money for the beneficiary. The trustee gets full authority to take decisions for the benefit of the trust. It is an ‘irrevocable’ trust.
#2 Charitable Trust
This is a common financial planning tool often undertaken by influential people and corporates. A charitable trust can be for the public or to fund any particular charity. It helps the trust creator to gain tax deductions and other valuable lifetime benefits in the overall estate planning.
#3 Medicaid Trust
As the name suggests, the Medicaid trust is created to protect certain amount of assets against any insurmountable medical expenses. The trust is beneficial to pay for long-term care costs; otherwise income from pensions, other assets, and bank savings often fall short. If the cost of long-term care is higher, one might not qualify for government Medicaid. This is when the trust comes into use.
#4 Qualified Domestic Trust (QDOT)
The QDOT is a special kind of trust empowering the surviving spouse of the deceased to take advantage of the marital deduction clause. The surviving spouse can be a non-U.S citizen, and can get 100% marital deduction on the assets placed into the trust before the death of the spouse. With this benefit, the surviving spouse does not need to pay any taxes on the attached assets in the estate.
#5 Qualified Personal Resident Trust (QPRT)
The QPRT is an ‘irrevocable’ real estate planning tool which allows the trust creator to remove any personal home from being attached to the estate documentation. This is done to help reduce the burden of gift tax on the beneficiaries. As the owner of the personal home, the estate creator can live in the home for a specific period of time with “retained interest” and once the period is over, the personal home is transferred to the beneficiaries. During the “retained interest” period, the value of the personal home is calculated on the basis of the federal rates given by the Internal Revenue Service (IRS).
#6 Life Insurance Trust
The life insurance trust is an ‘irrevocable’ trust, known as irrevocable life insurance trust (ILIT). Once it is created, the ILIT cannot be amended or rescinded. The trust is made to hold life insurance policies and assets, which is released to pay for estate taxes after the trust creator passes away. While the trust creator is still alive, the person cannot place in any request to withdraw any asset from the ILIT. Apart from being beneficial to pay estate taxes, the ILIT is an iron clad way of protecting the assets from being squandered by beneficiaries and preventing any creditor from accessing the assets.
#7 Asset Protection Trust
The asset protection trust is created to protect assets against claims from future creditors. Such trusts are often created outside of the United States but it is not necessary to transfer the trusts to the foreign jurisdiction. The trust is ‘irrevocable’ for a certain number of years and returned to the trust creator. The caveat is that there should not be a risk of creditors during the phase when the assets are being returned to the trust creator.
#8 Living Trust
The living trust is the most common trust in which a legal document is drawn up designating a trustee to execute the estate of the deceased for the beneficiaries. It is a way to manage the estate of the trust creator, settle bills and taxes, and effectively bypass the probate process. This trust can either be a ‘revocable’ or an ‘irrevocable’ one.
#9 Tax Bypass Trust
The tax bypass trust enables a spouse to leave a lumpsum amount of liquid money and/or assets in the name of the other spouse without attracting hefty federal estate tax payable on the death of the second spouse. This trust helps the surviving spouse and children to save thousands of dollars of estate tax.
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A trust is a favorable tool to manage and protect assets, and secure the life of your loved ones. Click to read more about how trusts and estates work, and get yourself an attorney.