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During your working years, if you save money diligently and make wise investment choices, you have a good chance of enjoying a comfortable retirement. But will you be taking proper care of your family after you're gone? The only way to answer that question is to do proper estate planning - and trusts can be a key element of your estate plan.

How do trusts work? As the grantor of a trust, you set up the rules and appoint a trustee, who manages the trust and its assets. You and other donors then fund the trust with securities and other assets. The trustee collects these gifts and invests the money according to the rules of the trust, which will also determine the trust's beneficiary - the recipient of the trust's proceeds.

Different trusts have different objectives. When you design your estate plans, you may well need more than one trust. Here are some of the most widely used ones:

  • Revocable Living Trust - A revocable living trust can help you leave assets to your heirs without going through the costly, time-consuming - and public - probate process. When you set up a revocable living trust, you can control your assets during your lifetime and determine how they will eventually be distributed to your heirs. You could, for example, have money distributed to your children or grandchildren in installments, over a period of years. Plus, a properly established revocable living trust will carry out your wishes if you become incapacitated.
  • Bypass Trust - If you're married, you can leave an unlimited amount of assets to your spouse, free of estate taxes and without using up any of your estate tax credit. But if your spouse then dies with an estate worth more than the federal estate tax exemption- $2 million in 2007 - his or her estate would be subject to the estate tax. Unfortunately, your original estate tax credit was unused and, in effect, wasted. Basically, a Bypass Trust allows both spouses' estate tax exemptions to be preserved, to the benefit of the surviving spouse and, ultimately, the children.
  • Special Needs Trust - If you have a family member with a disability, you might want to think about a Special Needs Trust. People with mental or physical disabilities can hold an unlimited amount of assets in a Special Needs Trust (sometimes called a Supplemental Needs Trust) without having the assets count against eligibility for certain governmental benefits, such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation and subsidized housing.
  • QTIP Trust - If you're married for a second time, but want to make sure your children from your first marriage are protected, you may want to think about a QTIP (Qualified Terminable Interest Property) Trust. A QTIP trust enables you, as grantor, to provide for your surviving spouse and also maintain control of how the trust's assets are distributed once he or she also dies.

Of course, trusts are complex instruments, so you should work with an attorney, in addition to a tax adviser to make sure you are using the right type of trust and then consider a financial professional for funding it with the appropriate vehicles. By using trusts wisely, you can leave a legacy that benefits everyone.

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