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An Overview of Types of Trusts

Many people start to think about planning for the future of their estate when they find out about the estate tax. For those that don't know, the estate tax is a tax that kicks in when the owner of the estate passes. This tax can wind up costing people a significant amount of money that otherwise could be passed down to their children or grandchildren.

As a result, many people will set up a trust that protects their assets from certain taxes. With many different kinds of trusts out there, it is important that people understand these trusts so they can make an informed decision. Once you have a solid overview of these types, please consider speaking with an experienced estate planning attorney in order to gather information specific to your circumstances. 

A Credit-Shelter Trust

This is also called a bypass trust or a family trust. In this trust, the owner will write a will. This will specifies who gets the assets in the trust up to the limit of the estate-tax exemption. After this, the rest of the trust's value gets passed to the spouse without getting hit by the estate tax.

Furthermore, people can specify how the assets in the trust will be used. Remember that the spouse is also entitled to an estate-tax exemption. This can increase the amount of money that is free from the clutches of the estate tax.

A Generation-Skipping Trust

This is also called a dynasty trust. This is the kind of trust that people will set up if they want their assets to go to someone other than their children, such as their grandchildren. This doesn't mean that the children cannot receive anything from this trust; however, it is not unusual for grandparents to want to split their assets between their children and grandchildren. If this is the case, this is the kind of trust that people should think about setting up.

A Qualified Personal Residence Trust

This is a trust that can remove the value of a home or vacation home from the estate. Remember that the estate tax looks at the total value of the property and not just the numbers in the bank account. Since people's houses typically appreciate in value, this is an interesting trust that people can take advantage of. The trust specifies the home as a gift that people can pass down to a beneficiary. In exchange, the home is removed from the value of the estate and therefore isn't included in the value of the estate tax.

4. Irrevocable Life Insurance Trust

It is not unusual for people to have life insurance policies that will pay out upon their death. These are typically large policies that can significantly change the value of the estate and therefore the potential hazards of the estate tax. This type of trust will remove the life insurance value from the estate tax.

In this trust, the person will surrender ownership rights of the policy; however, the proceeds from the policy will be used to pay estate costs and provide beneficiaries with tax-free income. People with life insurance should consider this.

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