ves as the trustee, but designates someone to take over in case the grantor is unable to serve as trustee. As life expectancies increase, this becomes a greater concern for many Americans. The revocable living trust is also used as a substitute for a will since assets placed in the living trust are not subject to probate.
The testamentary trust does not replace a will, but instead is established under it. This is a revocable trust since the individual can change a will at any time. This type of trust allows a trustee to manage assets on behalf of the grantor's heirs until the time that the grantor specifies the heirs are to receive the assets. All of the assets in this type of trust are included as part of the estate for tax purposes since the grantor retains control over them until death. When the income of the trust is distributed to the beneficiaries, they pay the tax on the income at that time. If the trust keeps the income, it pays the tax. This type of trust is often used by those with minor children in order to hold assets until the children reach an age where they have the maturity to accept responsibility for the assets.
Credit shelters are used when the grantor is married and has a substantial estate; this type of trust is able to hold $600,000 of assets tax free (this is the maximum amount which can be left to heirs on a tax-free basis). By preventing the spouse from having access to the principal, this type of trust ensures that the children will receive the proceeds. Or, the trust could be structured so that the spouse receives the income produced by those assets for the remainder of his or her lifetime, with the principal passing free of estate tax to the children upon the death of the spouse. This type of trust is often used by individuals who are marrying for a second time and have children from the first marriage.
Irrevocable trusts are established during the grantor's lifetime to hold assets over...