Like a Will, a trust is a written document that transfers property. A Will primarily states what you want to happen to your possessions after you die. A trust, however, can serve many purposes, such as:

  • Manage your property.

  • Distribute assets to beneficiaries.

  • Avoid probate.

  • Save on taxes.

You can establish different trusts to serve different purposes or benefit individuals or organizations. Restrictions on trusts also vary. To reduce taxes, for example, you have to put your property into a permanent trust. But trusts established solely to manage assets can be altered as circumstances change. Consider this short list of trusts typically associated with estate planning:

  • Revocable trust - You establish a revocable trust while you are alive. With this "living" trust, you can transfer as much property as you want to the trust without owing any gift tax. That's because the property remains in your estate. When you die, the property in the trust can go directly to your beneficiaries if that's the way you set up the trust.

    After your death and at your discretion, the trustee can continue to manage and distribute the property in the way you specify, thus avoiding probate. Avoiding probate is especially valuable when you are leaving property to minors, or when you own real estate in more than one state.

    You also can benefit personally from this "living" trust. Your trustee can protect you and your property in the event of accident, illness or the effects of aging that reduce or take away your ability to manage your own affairs. You can make it simple for your trustee by agreeing that your doctors - not the courts - can decide when you're no longer competent to act for yourself.

  • Bypass, unified credit or credit shelter trust - With this common trust, each spouse leaves property to his or her children with the condition that the surviving spouse has the right to use the income from that property for as long as the spouse lives. This trust allows both you and your spouse to take advantage of the unified credit equivalent.

    Because the tax-free amount is rising, by 2007 a married couple will be able to bequeath $4 million estate-tax free (twice the tax-free amount) if they have this type of trust. The trust won't actually come into legal existence until the first spouse dies.

    Although the money you leave behind is earmarked for your heirs (usually children), your spouse can collect the income from the money in the trust and in some cases even use some of the principal. Essentially, this type of trust bypasses both you and your spouse's estates and never gets hit by federal estate taxes. The bypass trust can be a part of your revocable trust or it can be established in your Will. You need a lawyer to arrange this type of trust.

  • Charitable trust - This trust involves making a gift to a charity. A charitable trust not only reduces the size of your estate and ultimately your estate taxes, but it also provides a potential charitable deduction to reduce your income taxes in the year you establish the trust. Either you can get the income earned by the assets in the trust or you get the trust balance back after a specific period of time.

  • Qualified terminable interest property trust (QTIP) - A QTIP trust often is matched with a bypass trust. For tax purposes, the asset value in a QTIP trust will go into your surviving spouse's estate, but you designate who gets the assets of the trust when your spouse dies.

    This trust allows you to leave more than the amount of the estate tax exemption to your children, but they won't have to pay taxes on it until your spouse dies. If you want to ensure that your assets go to your children from a previous marriage, for example, this type of trust lets you do it.

  • Irrevocable trust - An irrevocable trust is another trust you establish while you are alive. Once property is put in an irrevocable trust, however, it's there to stay and beneficiaries can't be changed. Trustees also may be permanent unless a trustee agrees to resign or dies.

    Irrevocable trusts can provide significant tax savings because the growth on the assets transferred into the trust is removed from your estate.

    To reduce your estate for tax purposes, though, the assets you give away or put in the trust must belong permanently and unconditionally to the recipient. From the government's viewpoint, you no longer control the property if someone else has the legal right to decide what to do with it or if it's part of a trust that you can't change.