Trusts are a very common part of many estate plans. Trusts come in many different varieties and serve a multitude of different purposes. Below are 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 him or her.
Credit Shelter Trusts:
Credit shelter trusts, which are also referred to as bypass or family trusts, are employed for the purpose of transferring assets while avoiding estate taxes. An individual will draft the documents to create the trust, then put a provision in his or her will that leaves assets up to the estate tax exemption to the 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.The assets in ILITs can be transferred to beneficiaries immediately in order to pay for any estate costs. One drawback to 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.