The type of trust you establish depends on your situation, asset mix, and wishes. Together with your tax and legal advisors, you must take into consideration control and flexibility issues, tax issues, and heir provisions.
Revocable Living Trust
A revocable living trust lets you enjoy all the benefits of a trust and control the transfer, management, and disbursement of your assets.
Key points of a revocable trust include:
- You retain full authority over the assets in your trust.
- You or any person or organization can act as trustee.
- Terms of the agreement can be changed or revoked anytime during your lifetime if circumstances or family relationships change.
- Backup or successor trustees can be named to assume management of your trust in the event you become incapacitated.
Irrevocable Trust
An irrevocable trust may help you reduce taxable income, capital gains, or estate taxes; support a family member; or fund a favorite charity. The trust then stands as a separate taxable entity and pays tax on its accumulated income.
Key points of an irrevocable trust include:
- A trustee supervises trust assets and the distribution of principal and income.
- Assets you place in the trust are generally considered gifts to the beneficiaries of the trust and must remain in the trust.
- In many cases, you may utilize the federal annual gift tax exclusion to fund the trust. Each year, an amount up to the annual exclusion amount ($13,000 in 2010 and 2011. $26,000 if gifting jointly with spouse. Both numbers indexed in future years.) can be gifted to each donor without incurring a gift tax as long as certain requirements are met.
- Once established, it cannot be changed, altered, or modified.
Charitable Remainder Trust
A charitable remainder trust enables you to make a large donation to a charity while you generally collect some tax benefits.
Key points of a charitable remainder trust include:
- A charitable income tax deduction.
- No capital gains tax liability.
- Exclusion of the transferred assets from your taxable estate.
- An income stream for a period of time for you or family members.
- Tax-advantaged diversification.
- A gift of the remainder of the trust assets to a valued charity or charities at the termination of the trust.
Irrevocable Life Insurance Trust
An irrevocable life insurance trust may keep the proceeds of your life insurance policies from being included in your taxable estate.
Key points of an irrevocable life insurance trust include:
- Estate tax savings.
- Proceeds can provide liquidity for beneficiaries when they may need cash most.
- Family has necessary funds even if assets can't or shouldn't be sold quickly.
Marital Trust (A Trust)
In 2011, under current tax law, at the death of the first spouse, the estate can utilize an unlimited marital deduction. This transfer of assets to the surviving spouse can be in trust. The surviving spouse usually has access to some or all of the trust assets in addition to receiving income from the trust at least annually. The spouse is given a life estate with a general power of appointment over the trust estate, meaning the surviving spouse has control over the trust and it is included in his or her taxable estate at death. The trust allows management of the assets by the trustee designated by the grantor (the first to die). Often this provides the grantor peace of mind knowing that the spouse will be provided professional management of the assets.
Other marital trust variations include:
- Qualified Terminal Interest Property (QTIP) Trust—a more restrictive marital trust eliminating control over the trust corpus, but still allowing for the unlimited marital deduction. The QTIP Trust is included in the taxable estate of the surviving spouse.
- Qualified Domestic Trust—a marital trust for non-U.S. citizens who are residents of the U.S., which preserves the unlimited marital deduction until the death of the surviving spouse or until the trust corpus is distributed.
Credit Shelter Trust (B Trust, Family Trust, or Bypass Trust)
This trust may generally pay income to the surviving spouse until he or she dies, and it may distribute principal to family members or others named as trust beneficiaries. At the death of the surviving spouse, the assets can pass directly to trust beneficiaries or be managed in the trust for their benefit. Under current law, in 2011, these trusts can prevent married couples from losing the value of the applicable credit of the first spouse to die.
Another valuable strategy for single and married people to consider is establishing and funding bypass trusts today so that the trust's growth escapes estate tax and avoids the diminishing effects of inflation. Your heirs may receive more value by funding the trust now rather than waiting to use the applicable credit amount available at your death.
You may consider funding your bypass trust today with life insurance. This strategy allows you to use the value of the bypass trust to purchase life insurance, which will pay the trust proceeds at your death that could be much larger than the applicable exclusion amount. This strategy uses these values to provide income for the surviving spouse and any other trust beneficiaries named.
Insurance is issued by The Prudential Insurance Company of America, Newark, NJ, and its affiliates. Each is a Prudential Financial company that is solely responsible for its own financial condition and contractual obligations. Our policies contain exclusions, limitations, reduction and terms for keeping them in force. A licensed financial professional can provide you with cost and complete details.