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US Estate Planning: Common Trust Types

The trust landscape offers specialized structures designed to address specific estate planning challenges and family circumstances. Each type serves distinct purposes, from minimizing taxes and protecting assets to providing for special needs beneficiaries or supporting charitable causes. Understanding these common trust varieties helps identify which structures align with your particular wealth transfer and protection objectives.


ILIT (Irrevocable Life Insurance Trust) US estate planning trusts

An ILIT removes life insurance proceeds from your taxable estate while providing liquidity to pay estate taxes and support beneficiaries. This structure is particularly valuable for wealthy families whose estates exceed federal exemption limits, as life insurance death benefits for high-net-worth individuals can often reach the maximum federal estate tax bracket of 40%.


Key features:

  • Is irrevocable — cannot be rescinded, amended, or modified after creation

  • Trust owns and is beneficiary of the life insurance policy

  • Grantor must survive three years after policy transfer for tax benefits

  • Provides estate liquidity without increasing taxable estate value

  • Can be funded with annual gifts to pay premiums using gift tax exclusions

  • Death benefits pass to heirs free of estate and income taxes

SLAT (Spousal Lifetime Access Trust)

A SLAT allows one spouse to create an irrevocable trust benefiting the other spouse, effectively removing assets from the grantor's estate while maintaining indirect family access. This strategy is well-suited to couples with significant wealth who want to use their lifetime exemptions while preserving some access to transferred assets.


Key features:

  • Grantor spouse creates irrevocable trust for benefit of non-grantor spouse

  • Removes assets from grantor's taxable estate immediately

  • Provides indirect access to trust assets through beneficiary spouse

  • Can include children and descendants as remainder beneficiaries

GRAT (Grantor-Retained Annuity Trust)

GRAT allows grantors to transfer appreciating assets to beneficiaries while retaining annuity payments for a specified term, making them particularly effective for assets expected to outperform the IRS-assumed rate of return. This irrevocable trust structure works by "freezing" the gift value at the time of transfer, allowing any appreciation above the Section 7520 rate (120% of the federal midterm rate for the month in which a valuation occurs) to pass to beneficiaries gift-tax-free.


Key features:

  • Grantor receives fixed annuity payments based on IRS Section 7520 rate

  • Any asset appreciation above the assumed rate passes to beneficiaries tax-free

  • Grantor must survive the trust term for benefits to apply - death during term returns assets to estate

  • Most effective in low interest rate environments when assets can easily outperform assumed returns

  • Particularly valuable for pre-IPO stock, real estate, and other high-appreciation assets

Charitable Remainder Trust (CRT)

CRTs provide income to the grantor or other beneficiaries while ultimately benefiting charity, offering immediate tax deductions and potential capital gains deferral. These trusts work particularly well for individuals with highly appreciated assets who want to support charitable causes.


Key features:

  • Provides income stream to non-charitable beneficiaries for specified term

  • Remainder passes to qualified charitable organizations

  • Grantor receives immediate income tax deduction for charitable remainder value

  • Can defer capital gains taxes on contributed appreciated assets

  • Charitable organizations receive distributions free of income tax

  • Reduces estate taxes by removing assets from taxable estate

Special Needs Trust

Special needs trusts provide financial support for disabled beneficiaries without jeopardizing eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid. These trusts can be first-party (self-funded by the beneficiary) or third-party (funded by an individual who is not the beneficiary). First-party special needs trusts are irrevocable, while third-party variations can either be revocable or irrevocable.


Key features:

  • Preserves beneficiary's eligibility for government benefits

  • Trustee has discretion over distributions

  • Protects trust assets from creditors and claims

  • First-party trust must be established before beneficiary is 65 years of age

  • Trust ends upon death of the beneficiary; remainder beneficiaries can be named, or remaining assets can pass to the original beneficiary’s estate. 


Considerations: 

These trusts require careful administration and oversight to ensure compliance with regulations, and that distributions supplement rather than replace public assistance.

QDOT (Qualified Domestic Trust)

A QDOT provides the marital deduction for estate taxes when the surviving spouse is not a U.S. citizen, addressing a significant gap in standard estate tax law. Under normal circumstances, only U.S. citizen surviving spouses can claim the unlimited marital deduction, but QDOTs extend this benefit to non-citizen spouses for assets placed within the trust structure.


Key features:

  • Allows non-citizen surviving spouse to claim 100% marital deduction on estate taxes

  • Must have at least one U.S. citizen trustee or domestic corporation as trustee

  • Defers rather than eliminates estate taxes - taxes become due upon surviving spouse's death

  • Can be established by the decedent before death or by surviving spouse before estate tax return filing

  • Assets outside the trust remain subject to immediate estate taxation

  • Particularly valuable for couples with significant assets where one spouse lacks U.S. citizenship


Dynasty Trust

Dynasty trusts hold assets across multiple generations while minimizing transfer taxes, creating lasting family wealth preservation vehicles. These irrevocable trusts can continue indefinitely in states without rule against perpetuities, allowing families to build and maintain wealth across centuries.


Key features:

  • Designed to benefit multiple generations of family members

  • Minimizes estate, gift, and generation-skipping transfer taxes

  • Grantor establishes distribution standards and family governance rules

  • Cannot be altered or dissolved by grantor or beneficiaries

  • Provides long-term asset protection from beneficiary creditors

  • Requires careful planning based on favorable state laws

  • Often combined with other trust strategies for maximum effectiveness


📚 Article Series: US Estate Planning

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