TYPES OF TRUSTS

Trust: A trust is a legal entity (a holding device), created either during a person’s lifetime (an intervivos or living trust) or at death by a Will (a testamentary trust), which transfers property to someone (called the Trustee) for the benefit of persons designated as beneficiaries in the trust instrument. See “Trustee” and “Beneficiary.”

Living trust without tax planning: A living trust is a trust established during your lifetime, rather than at death. Much like a comprehensive will, a properly drafted living trust can provides excellent creditor protection for beneficiaries who inherit your estate and in addition, avoids probate if properly funded during your lifetime. You may be the trustee of your trust and have full control over trust assets. However, if you become mentally incapacitated, a successor trustee (usually your spouse) takes over and manages your trust estate for you without the hassles sometimes encountered with powers of attorney.

Testamentary trust: A testamentary trust is a trust established upon death by a will, rather than during your lifetime. A testamentary trust offers the same tax advantages as a living trust does, but does not avoid probate.

Credit shelter trust: A credit shelter trust is a tax planning trust which assures that your federal estate tax exemption is “sheltered” rather than wasted by your death. It can be established during your lifetime or upon death depending on whether you want to avoid probate or not. It allows you and your spouse to pass on an estate worth up to $1,000,000.00 during years 2002 and 2003 without incurring any transfer taxes.

GST or dynasty trust: A GST trust allows generation after generation to benefit from the trust without having trust assets included in any beneficiary’s estate for estate tax purposes. The GST exemption is currently $1,060,000 and increases to $3.500,000 by the year 2009. Generation skipping transfers which exceed the exemption are subject to a flat 50% GST tax in addition to estate and gift taxes.

QTIP trust: A qualified terminable interest property trust is generally used in a second marriage situation when your spouse is to receive trust income for life and upon your spouse's death, the principal of the trust will be distributed to children from a prior marriage.

QDOT trust: A qualified domestic trust allows use of the marital deduction for assets passing to a non-citizen spouse. Without it, transfer taxes are due on assets worth more than $106,000 per year passing to a non-citizen spouse.

ILIT trust: An “irrevocable life insurance trust” prevents life insurance proceeds from being included in your estate for estate tax purposes. Typically, life insurance proceeds are included in your estate even though they are paid to your spouse, children or other beneficiaries.