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How to choose the right trust

California residents who are interested in planning an estate may have questions about incorporating a trust into their preparations. Knowing what trusts are available and which ones work best in certain circumstances makes the choice easier.

The first priority is deciding on whether to have a living or testamentary trust. A living trust is established while the trust owner is alive and can exist in two forms. The first, called a revocable trust, is one that the owner controls and is able to modify. The beneficiaries may be changed, and the grantor may revoke the trust entirely. The second type of living trust is an irrevocable trust. In this case, the grantor is unable to make changes to the trust, and it is protected from estate taxes.

A testamentary trust is one that is created after the testator dies with the provisions outlined in the individual's will. Another type of trust is that in which the grantor may bequeath assets to grandchildren. Credit shelter trusts or bypass trusts allow a grantor to place assets in a trust that are not subject to estate tax.

Life insurance trusts are irrevocable. In order to set one up, the holder of the life insurance policy turns over ownership of the policy to the trust. This means that the insured cannot use the insurance as collateral on a loan and cannot change the policy's beneficiary. The funds in the life insurance trust are tax-free and may be used to pay estate costs.

If an individual is considering setting up a trust, it may prove beneficial to consult with an attorney. The attorney may provide guidance into which type of trust might be best. An attorney may also help draft the appropriate documents for the trust.

Source: CNN Money, "What kinds of trusts are there?", December 05, 2014

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