Most people are familiar with the estate tax and the damage it can cause to someone’s potential inheritance. For those who might be unfamiliar, the estate tax is a tax that kicks in when someone dies. Poor estate planning could lead to someone losing half of their estate or more depending on the presence of a state version of the estate tax.
One of the ways that someone could potentially avoid the estate tax is to take advantage of a trust. With so many different types of trusts, it is important for people to understand the different kinds of trusts to make sure that they are using the proper trust for the proper situation.
A Revocable Trust
This is one of the most basic types of trusts. It is created while the person is still living and can be changed or completely revoked depending on the course of someone’s life. These are one of the key ways that people can avoid the expenses of probate court. The ownership of the assets contained in the trust is transferred from the individual to the trust during the lifetime of the individual. The trust is the legal owner of the items when the person dies, thus ensuring that the assets are not subject to any form of probate court.
Predictably, an irrevocable trust is a trust that cannot be revoked or changed once it is created. The irrevocable trust takes ownership of all assets in the trust and its ownership cannot be revoked. This is a trust that has a wide range of applications and can help someone significantly cut down on the amount of estate tax that they could potentially owe.
As the same suggests, this trust is set up for the benefit of a charity of the individual’s choice. Many experienced estate planners will take advantage of a charitable trust to simultaneously lower the damage of any estate or gift tax and benefit a charity of the person’s choice. When people are planning for their death, they cannot take their funds with them. They can either give the value of the estate to their friends and family, a charity, of the government. Many people choose to give to a charity, especially since charities typically honor people who are kind enough to think about them with a charitable trust.
Tax By-Pass Trust
This is a common type of trust that one spouse can use to leave some of their estate to the other spouse. This also cuts down on the amount of money that a person would awe with the estate tax. While the death of the first spouse would not trigger any estate tax, the death of the second spouse could potentially leave more funds subject to an estate tax. This is a key way to save money for the children as well.
Ultimately, these are only a few of the many different types of trusts. Anyone thinking about using trusts as part of their estate planning should contact an experienced legal professional for guidance.