Trust Basics: Trust Type

All trusts operate in the same basic manner. A person, known as a grantor, settlor or trustor, decides to create a trust. The grantor then decides what property the trust should own, what rules it will operate under and who will receive the benefits of that property, known as the beneficiaries. To manage the trust, the grantor will also appoint a trustee.

But those basic parts do not convey how many types of trusts there are. There are trusts you can create to take advantage of tax exemptions, provide for a child with disabilities or any number of particular purposes. You should always talk to an estate planning lawyer about what kinds of trusts are available to you, but here is a brief list of some of the more commonly used in estate planning situations.

Bypass Trust

A bypass trust, sometimes called a credit-shelter trust, allows spouses to pass on property to each other after death so that they take full advantage of the estate tax exemptions. The money you place in a bypass trust is tax exempt, even if it gains value during the lifetime of the trust.

Life Insurance Trust

The benefits of your life insurance policy are subject to taxes after you die, but by creating a life insurance trust you can ensure the benefits pass tax free. Once you transfer the life insurance policy to the trust you can no longer change beneficiaries, but the beneficiaries can receive a tax-free payment.