Revocable Living Trust

A "living trust" (sometimes called a "loving trust") is a special legal entity that you create by preparing and executing a formal trust document, declaring that you are holding certain property "in trust." You retain the right to "revoke" the trust at any time, or to take the property back out of the trust. Because the trust is revocable, it is treated as a fictional entity during your lifetime. You pay taxes on any trust income during your lifetime, and your creditors could seize trust assets to pay your debts.

However, at your death, the trust becomes irrevocable (since you are no longer around to revoke it), and takes on new life as a truly separate legal entity. Any property owned by the trust is not subject to probate, because it is not owned by you or your estate at all. However, the probate court has authority to resolve disputes about the trust, and the trust usually remains liable for your debts (including any estate taxes).

If a husband and wife jointly create a revocable trust, then when one spouse dies, the trust is usually split into two parts: one contains the surviving spouse's property, and remains revocable, while the other part is irrevocable and is usually earmarked for the use of the surviving spouse, with any balance remaining at the survivor's death passing to the couple's children. However, many different trust arrangements are possible, each with differing legal and tax consequences.

If you properly transfer your property into a revocable trust, then your estate will not need to pass through probate at your death. A carefully-drafted living trust can serve to reduce or eliminate federal estate taxes, but it is important to recognize that any estate-tax benefits available through a "living trust" can also be obtained by an equally-carefully-drafted will. (A will, however, is subject to probate.)

Irrevocable Life Insurance Trust

If you die owning a life insurance policy on your life, the proceeds are subject to estate tax. A life insurance trust is an irrevocable trust specifically designed to hold life insurance. It is structured to prevent the policy proceeds from being subject to estate tax.

A life insurance trust can be implemented to pass benefits to your children without subjecting the insurance proceeds to estate tax. It can also be used to provide liquidity to pay estate taxes upon your death. If you establish a life insurance trust with insurance on your life, the trust can be maintained after your death, and provide income to your spouse's estate.

Qualified Personal Residence Trust (QPRT)

A QPRT is a special trust designed to provide estate and gift tax benefits for a personal residence or a vacation home. A QPRT allows you to transfer your home to your children, resulting in a current taxable gift that is a fraction of today's value, while retaining the right to live in the home for a chosen term of yeas. At the end of the term of years, the house goes to the children, free from any estate and gift tax.

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