Your 2017 Guide to Trusts

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Providing for your family's financial needs is a key goal that most people have, but many of those who consider estate planning don't know that trusts can help them achieve their goals. Trusts are extremely flexible solutions to a host of potential problems, and they aren't just for the wealthy. In particular, the following types of trusts offer a broad range of applications that can be useful for estate planning:

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  • Revocable trusts, also known as living trusts
  • Testamentary trusts
  • Bypass trusts
  • Marital trusts
  • Life insurance trusts
  • Charitable trusts
  • Qualified personal residence trusts
  • Special needs trusts

Below, you'll find some basic information on each of these trusts and how you can use them.

Revocable trusts

A trust that you can change after its creation is a revocable trust. Also known as a living trust because it's made during the creator's lifetime, a revocable trust lets you set aside property and have it managed according to the terms of the agreement.

Revocable trusts are useful for two purposes. First, if you suffer a major illness or injury and aren't able to manage your financial affairs, your designated trustee can step in and do so on your behalf. Second, a revocable trust can be used as your primary estate planning document, giving instructions on what should happen to your assets after your death in a way that typically avoids the lengthy and expensive probate process.

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Testamentary trusts

Trusts whose provisions are contained in a will are known as testamentary trusts. These trusts don't take effect until after your death, but at that point, they become active and hold whatever assets your will directs them to own. Testamentary trusts don't avoid probate and can't take the place of a will, but they do avoid the need to take action to fund the trust during your lifetime, as a revocable trust requires.

Bypass trusts

Bypass trusts are trusts that are set up to take advantage of the lifetime exemption from the estate tax. These trusts are designed so that a surviving spouse can withdraw assets if necessary, but children or other heirs are generally the intended final beneficiaries of the trust assets. In the typical estate plan, the surviving spouse receives any additional assets beyond what the bypass trust gets. Depending on the size of the estate, a bypass trust can be the biggest portion of someone's legacy, especially now that the annual exclusion has risen to nearly $5.5 million.

Marital trusts

Martial trusts are trusts for the primary benefit of a surviving spouse but that also have provisions to benefit children and other family members. These trusts are set up to take advantage of the unlimited marital deduction from estate tax while still placing some limitations on the amount of money that the surviving spouse can spend from the trust. Marital trusts are most commonly used in situations in which children from a previous marriage are perceived as competing against the surviving spouse for the inheritance, and they can help ensure a more harmonious family situation.

Life insurance trusts

Life insurance trusts are irrevocable trusts set up to help avoid having to pay estate taxes on life insurance policies. Under estate tax laws, if you own a policy, then its death benefit is included in your taxable estate even though it doesn't pay out until after you pass away. However, if someone else owns the policy, then you can generally avoid estate tax. Life insurance trusts have carefully drafted provisions to avoid estate taxation, and they can reduce estate tax bills by millions for high-net-worth individuals who take maximum advantage of them.

Charitable trusts

Certain trusts are set up with the intent of providing benefits both for oneself or family members as well as a charitable organization. These charitable trusts come in two primary categories. Charitable remainder trusts pay income to the donor during the donor's lifetime, but after the donor passes away, the remaining trust assets get contributed to charity. Charitable lead trusts work in the reverse order, with charities getting a set amount of assets on a regular basis, and then a family member receives whatever assets remain. Both types can qualify for favorable income tax benefits for making charitable donations, and they can also shelter contributed trust assets from capital gains tax and other liability.

Qualified personal residence trusts

Qualified personal residence trusts, or QPRTs for short, are trusts designed to hold the real estate where you live. The trust holds your home and allows you to live in it for a fixed period of time set by the terms of the trust. After that period, the home goes to whomever you name as the trust beneficiary. The benefit of a QPRT is a discounted valuation for gift tax purposes, which can save you on estate and gift tax. The strategy requires that you outlive the term of the trust in order to reap the rewards, so QPRTs don't always work out well, but you're typically in no worse a situation even when things go wrong than you would have been without the QPRT in the first place.

Special needs trusts

Those who have disabilities or health conditions that qualify them for government assistance can benefit from a special needs trust. These specialized trusts are set up to provide additional financial support for those who qualify for assistance programs without disqualifying recipients from continuing to receive government benefits. By providing for things above and beyond the bare minimum that most government assistance will pay for, a special needs trust will let you ensure that a loved one has a better quality of life.

Get the trust you need

As you can see, trusts can cover a wide range of needs, and the right trust can do wonders for your family's well-being. By looking at how trusts can help you, you'll be in a better position to make a real difference in the legacy you leave behind.

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