The types of trusts people use depend on their goals.
Estate planning can have various components depending on individual specific needs and goals.
Smaller estates with responsible heirs may find arranging for direct non-probate transfers of their assets sufficient, with a last will and testament as a backup.
Larger estates or those with more financial and relational complexity often benefit from trusts.
According to a recent Fortune article, “Understanding trusts: An important estate planning tool for everyday Americans,“ people would use trusts depending on their goals and assets.
What are common types of trusts?
The AB trust goes by several names.
It is also commonly called a bypass trust or a credit shelter trust.
An AB trust is technically two trusts married couples use to optimize estate tax exemptions.
Of the two trusts, the A trust is for the surviving spouse, and the B trust is for the deceased spouse.
Assets up to the applicable estate tax exemption are transferred into the B trust.
The beneficiaries of the B trust can be the surviving spouse, children of the couple, or both.
In the process, the assets in the bypass trust bypass inclusion in the estate of the surviving spouse.
Any assets remaining above the applicable estate tax exemption (i.e., $12.92 million per person in 2023) fund the A trust for the surviving spouse.
Depending on the design of the A trust, after the death of the surviving spouse, all assets can then be distributed to beneficiaries.
When would an AB trust be effective?
These types of trusts benefit married couples with significant wealth and large estates to help them maximize estate tax exemptions.
These types of trusts have numerous benefits for you, your beneficiaries, and the charitable organization of your choice.
Charitable trusts can be charitable lead trusts (CLT) or charitable remainder trusts (CRT).
Both are irrevocable trusts.
To set up one of these trusts, the charitable organization must be a qualifying organization per the guidelines of the Internal Revenue Service.
With a CRT, you and your beneficiaries receive an income while alive.
It is best to fund a CRT with highly appreciated assets.
The trust will then sell these to create an income stream while avoiding capital gains taxes on the sale.
When you have died, the remaining assets are distributed to the charitable organization or organization listed as beneficiaries.
With a CLT, your charities receive benefits while you are alive.
After you die, your designated beneficiaries receive the remaining assets.
With a CLT, you can fund the CLT while you are alive or when you die through instructions left in your last will.
Who would benefit most from a charitable trust?
Those with philanthropic goals and highly appreciated assets would find this particular trust helpful.
Also, it appeals to folks who want to be “voluntary” philanthropists to the charities of their choosing instead of “involuntary” philanthropists to their state and federal governments.
Grantor Retained Annuity Trust (GRAT).
A GRAT is another form of an irrevocable trust.
Those with great wealth can minimize the tax implications for their beneficiaries by using this type of trust.
Assets expected to appreciate are transferred to the trust.
You will then designate a term (i.e., a set period) for you to receive annuity payments based on the assets.
After the term of the GRAT expires, the assets and appreciation from the assets will pass to your heirs with a negligible tax burden or no tax burden.
If your heirs are at risk of paying taxes on their inheritances, this is a smart choice.
A GRAT may be best for wealthy individuals who want to help family members avoid paying estate taxes on their inheritances.
It was a version of GRAT, for example, that kept the Walton (Walmart) fortune intact.
Irrevocable Life Insurance Trust (ILIT).
Some types of trusts are designed for specific assets.
Such is the case with an irrevocable life insurance trust (ILIT).
This type of trust is funded using one or more life insurance policies.
After you die, these payouts can be used for funeral expenses or estate taxes, so other assets do not need to be liquidated to serve such purposes.
If you expect to pay estate taxes and shield life insurance policies from divorce or creditors, an ILIT can be a good option.
Supplemental Needs Trust.
These types of trusts benefit those who have loved ones under age 65 with physical or mental disabilities.
They can help provide financially for these loved ones without disqualifying them from means-tested public assistance like Medicaid or Social Security benefits.
Because there are several variations of these trusts, you should work with an experienced estate planning attorney to ensure your specific goals are met.
Those with significant wealth or specific family needs may benefit from one of the types of trusts described above in broad, general terms.
Reference: Fortune (June 9, 2023) “Understanding trusts: An important estate planning tool for everyday Americans“