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8 Most Common Trusts in Estate Planning

Trusts play a crucial role in estate planning by providing a structured way to manage and distribute assets according to specific wishes and goals. They can help minimize taxes, protect assets from creditors, and ensure financial security for beneficiaries. Engaging a financial advisor who is knowledgeable about the different types of trusts is invaluable, as they can guide individuals in selecting the appropriate trust to meet their estate planning needs. Here are eight common types of trusts used in estate planning:

  1. Marital Trusts (“A” Trust): Designed for the benefit of a surviving spouse, allowing them to receive trust assets and income without estate tax during their lifetime. Estate taxes apply to remaining assets passed to heirs after the surviving spouse’s death.
  2. Bypass Trusts (“B” or Credit Shelter Trusts): Helps married couples reduce estate taxes by splitting assets into two trusts at the first spouse’s death. One trust up to the estate tax exemption limit and another for the surviving spouse. Remaining assets to heirs are estate tax-free.
  3. Charitable Trusts: These include charitable lead trusts and charitable remainder trusts. They enable individuals to donate assets to charity while providing for beneficiaries, either by designating remaining assets to charity after beneficiaries’ needs are met or vice versa.
  4. Generation-Skipping Trusts: Allows assets to be passed directly to grandchildren, bypassing children to avoid estate taxes, though children may still receive income from the assets.
  5. Grantor Retained Annuity Trust (GRAT): Designed for tax-efficient gifting, this trust pays the grantor an annuity for a set term, with remaining assets passing to beneficiaries tax-free at the term’s end.
  6. Life Insurance Trusts: Holds life insurance proceeds in an irrevocable trust to avoid estate taxes on the payout, with the trustee managing proceeds for beneficiaries’ benefit.
  7. Special Needs Trusts: Provides for the financial needs of a disabled dependent without affecting their eligibility for government benefits, ensuring funds are used for medical care or daily expenses.
  8. Spendthrift Trusts: Protects beneficiaries from misusing their inheritance by restricting access to the trust principal, allowing only income or interest to be used according to specified terms.