Here's what you need to know about eight basic types of trusts.
Bypass Trust (also called Credit Shelter Trust or Applicable Exclusion Trust): Allows the grantor to take advantage of the lifetime applicable exclusion. It bypasses the surviving spouse's estate. "The grantor's spouse is given some type of ownership interest, but not so much that the assets are included in the estate," says Gregg Parish, academic associate at the College for Financial Planning in Denver.
Charitable Remainder Trust (CRT): Client gifts highly appreciated assets to a CRT. The trustee sells the assets, avoiding capital gains taxes, and invests in an income-generating asset. The client, who may get an income tax deduction, receives an income stream. When the client dies, the remaining CRT assets go to the charity.
Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT): With a GRAT, the client gifts assets to a trust and receives a fixed annual amount based on the initial principal for a defined period of time, then assets pass to beneficiaries. Valuation is discounted. With a GRUT, assets are gifted to the trust, and the client gets a fixed percentage of the assets, revalued annually for a defined period. With GRATs and GRUTs, if the client survives the defined period, the assets are not included in the estate.
Revocable Living Trust: A trust that a client can change during his or her lifetime, but becomes irrevocable upon death. Contains instructions for property distribution. Avoids probate, but not taxes. In case of incapacity of the grantor, the successor trustee would take over.
Qualified Personal Residence Trust (QPRT): Client donates a residence to a trust, but retains the right to live there for a fixed number of years. Client pays mortgage and real estate taxes into trust. When the time period ends, assets are turned over to beneficiaries. If the client wants to continue living there, rent must be paid. If the client survives the trust time period, the residence is excluded from the estate.
Qualified Terminal Interest Property Trust (QTIP): The basic use is for a client to direct where assets ultimately go. The trust's assets provide income to the surviving spouse, at which time heirs receive the money. QTIPs generally qualify for the unlimited marital deduction, so asset values are included in the estate of the survivor.
Testamentary Trust: A trust that takes effect when the client dies.
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