Carlton Financial Group - Insurance, IRAs, College Planning and more

Often I am asked about the differences between Trust in regards to estate planning. Below I have covered the four most common types of trust.

Marital Living Trust

This trust is for married couples with estates of such size that estate tax avoidance is not the primary goal and the need for more than one credit is not necessary. In the Marital Trust, you do not reap some of the benefits of the A/B/C Trust. This type of trust is appropriate for smaller estates because there are no restrictions on the surviving spouse that may require all of the estates assets in order to maintain his/her quality of life.

Individual Living Trust

As expected, this trust is for individuals. It is for single people, whether divorced, widowed, or never married and works like a Marital Trust.

A/B/C Trust

The A/B/C Trust is primarily used an estate tax reduction plan. It is a combination of a Marital Deduction Trust and a Credit Shelter Trust. Normally each spouse has an estate tax credit. Any amount exceeding the the credit amounts for each spouse is taxable according to the year of the death of the second spouse and the value of the total estate at that time. The estate tax can be the most expensive part of the estate settlement process. Using this trust instead of a Marital Trust will allow each spouse a full estate tax credit, thereby increasing their estate tax exemption two-fold.

With the utilization of an A/B/C Trust, the financial outlook is much brighter. The A/B/C Trust actually contains two halves, the husband's share and the wife's share. Upon the onset of an illness, one-half of the assets are reserved in trust. Once the ill person's half of the estate in consumed, the person may then receive government medical assistance without reducing the other spouse's half of the estate.

When utilizing the A/B/C Trust after the death of the first spouse, the surviving spouse has complete control of one-half of the estate. The other half, the decedent's share, is earmarked for the final beneficiaries however, the surviving spouse can receive income from this half, and is allowed to use principal for health, education, maintenance and support under current IRS guidelines.

in the A/B/C Trust, the decedent's half does become irrevocable at death, thereby allowing tax savings and the advantage of catastrophic illness and nursing home protection.

Irrevocable Life Insurance Trust

Over the past decade, estate taxes have become a problem for many Americans.-even in what were considered modest estates just 10 to 15 years ago. Due to ordinary inflation and modest growth factors, many heirs now face some degree of estate taxation. The good news is that the IRS allows the creation of an Irrevocable Life Insurance Trust (ILIT), which is specifically designed to pay taxes.

By utilizing gifting laws, the ILIT allows you to reduce your taxable estate through gifts to your beneficiaries into a life insurance contract, thereby creating the necessary funds and liquidity to pay the Federal Estate Taxes. This keeps the eventual heirs from having to "force sell" assets or borrow funds in order to pay estate taxes. This strategy allows 100% of your hard earned estate may be passed on to your beneficiaries.