Part 1: Five standard forms of trusts

There are five standard forms of trusts. Each type has advantages and disadvantages, which you should discuss with your estate-planning attorney. The first type is as follows:

Credit-shelter trust: With a credit-shelter trust (also called a bypass or family trust), you write a will bequeathing an amount to the trust up to but not exceeding the estate-tax exemption. Then you pass the rest of your estate to your spouse tax-free. You also specify how you want the trust to be used -- for example, you may stipulate that income from the trust after you die goes to your spouse and that when he or she dies, the principal will be distributed tax-free among your children.

Since your spouse is also entitled to an estate-tax exemption, the two of you can effectively double (or more than double) that portion of your kids' inheritance that is shielded from estate taxes by using this strategy.

And there's an added bonus: Once money is placed in a bypass trust it is forever free of estate tax, even if it grows. So if your surviving spouse invests it wisely, he or she may add to your children's inheritance.

Of course, you can pass an amount equal to the estate-tax exemption directly to your kids when you die, but the reason for a bypass trust is to protect your spouse financially in the event he or she has need for income from the trust or in the event you think your children will squander their inheritance before the surviving parent dies.

Original Source: CNN Money, Money Essentials

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