Trusts can provide a way for you to transfer your assets to your family while implementing safeguards to ensure the money isn’t spent too quickly. Both beneficiary trusts and marital trusts can be revocable trusts, meaning you can terminate the trust during your lifetime if you change your mind. However, the trusts become irrevocable upon your death. You can use either type of trust, or both, according to your needs and the goals you want to accomplish.
Credit Shelter Trusts
Marital trusts vary in complexity, but they are generally designed to take advantage of provisions in federal tax laws allowing property to pass from you to your surviving spouse without being taxed. The credit shelter trust, or AB trust, is the most common type of marital trust. Under a credit shelter trust, the trust is split when you die. One trust contains your property (Trust A) and one contains your spouse’s property (Trust B). Your spouse retains the right to use the property in Trust A for her lifetime, but it passes to your named beneficiaries when she dies. When she dies, the property in Trust B also passes to the named beneficiaries. When you and your spouse split your property appropriately, you might avoid estate taxes altogether. For example, if you own $4 million in assets, your credit shelter trust might split those assets into separate $2 million trusts (A and B). If the estate tax cap at the time of your death is $3.5 million, the separate trusts avoid estate taxes where you would have paid taxes on the entire $4 million if you didn't have a trust.
A qualified terminable interest property (QTIP) trust is another type of marital trust. It gives your spouse all of the trust income for her life, but can be designed to give the property in the trust to other beneficiaries, such as children or grandchildren, upon your spouse's death. QTIP trusts can include income-producing assets, such as investment property, stocks or rental homes. QTIP trusts are frequently used by people in a second marriage because they protect a child’s inheritance while allowing a spouse to benefit from the property while she is alive. For example, if you have children from a previous marriage, you can name them as the beneficiaries of your trust but give your current spouse the rights to income from the trust’s assets while she is alive.
You can also give your spouse the ability to decide who inherits your property when she dies. To do this, you can give your spouse a life estate in your property under your will. With a life estate, your surviving spouse does not have full ownership rights to the property after you die, but she does have the ability to benefit from the property during her life. By giving her a life estate with power of appointment, you allow your surviving spouse to leave the property to beneficiaries of her choosing. This gives you less control over which beneficiaries receive your property after your death than you have under a QTIP or credit shelter trust.
A beneficiary trust, or legacy trust, gives benefits to your named beneficiary but does not allow him to control the property in the trust. For example, if you create a beneficiary trust for your son, he receives the income from the trust during his lifetime but cannot sell the trust’s property. You can also direct that funds in the trust go to your son’s children or other beneficiaries upon his death. Since the trust’s assets are not titled to the beneficiaries, your beneficiaries’ creditors cannot claim the assets, nor can your beneficiaries lose the assets through divorce. If you are concerned about your beneficiary’s ability to handle money, you can include a spendthrift provision in the trust, preventing your beneficiary from borrowing against the trust's income or property.
References & Resources
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