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Types of Trusts

There are two different types of trusts: living trusts and testamentary trusts. A living trust is a trust in which assets are placed while you are still living. With a testamentary trust, assets are placed in the trust after you die. This trust is created after probate, according to your desires.

1. Living Trusts. There are two different types of living trusts: revocable living trusts and irrevocable living trusts.

A revocable living trust allows for unlimited control by the trust owner, because the owner retains the title to all the assets in the trust. The advantage of a living trust is that the assets in the trust do not pass through probate when the owner dies. In addition, a living trust provides greater ease of distribution and greater privacy upon death. The disadvantage to a living trust is that it does not provide any tax advantages. The entire amount of the living trust is considered an asset for estate tax purposes.

An irrevocable living trust is a trust that cannot be changed by the owner once established, because the trust becomes a separate legal entity that owns all the assets it contains and pays taxes on the assets and the gains they produce. The advantage of an irrevocable living trust is that the assets are not subject to estate taxes, since they are not part of the owner’s estate. Additionally, assets in the trust do not pass through probate. The disadvantage to an irrevocable living trust is that the owner no longer has the title to or use of any of the assets.

2. Testamentary Trusts: A testamentary trust is a trust in which assets are placed in the trust only after the owner dies. The trust is created after probate, according to the desires of the owner, and the assets are transferred into the trust. There are different types of testamentary trusts, including standard family trusts, qualified terminable interest property trusts (Q-TIP trusts), and sprinkling trusts.

Standard family trusts hold the assets of the first spouse who dies until the second spouse dies. The surviving spouse has access to income from the trust, or the trust principal, if necessary. Standard family trusts reduce the size of the estate for the second spouse, which reduces estate tax liability.

A Q-TIP trust provides a means of passing on income to a surviving spouse without turning over control of the assets. These trusts ensure that assets will be passed on to your children upon the death of your surviving spouse.

A sprinkling trust distributes assets to a designated group of beneficiaries on an as-needed basis rather than in accordance with some preset plan.


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