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A closer look at some non-traditional types of trusts - II

Gregory A. Lang

In our previous post, we discussed the many advantages presented by a trust to both the trustor (i.e., the person who creates the trust) and the intended beneficiaries.

For example, a trust allows the trustor to ensure that their exact wishes are carried out, minimizes potential tax burdens, avoids the time-consuming and expensive probate process, and keeps matters largely private.

We also discussed that while one of the more commonly executed types of trust is the revocable trust -- because it gives a trustor the right to alter its terms and receive any income generated by the trust during their lifetime -- there are also other non-traditional types of trusts available to help people meet their estate planning goals.

In today's post, we'll continue this discussion of non-traditional trusts.

Funeral trust: A funeral trust is exactly what it sounds like, a mechanism through which a trustor can fund plans for their final arrangements. Here, the trustor reaches an agreement with a funeral home on the cost of their funeral arrangements and provides a prepayment, which the funeral home will then hold until such time as the trustor passes away.

When it comes time for solidifying funeral arrangements, the named beneficiaries can then use the earmarked funds to cover the costs of everything from the service and cremation to the flowers and headstone.

Rabbi trust: Despite its name, a rabbi trust is in no way affiliated with any sort of religious purposes. Rather, its name simply derives from the fact that the very first version of this trust to receive approval from the Internal Revenue Service was established for a rabbi.

What makes a rabbi trust stand out is that it functions much like a pension plan or 401(k) in that it can be used by employers as a mechanism to defer compensation -- salary, bonuses, etc. -- until an employee (who must request that the money be deferred in this way) retires.

Here, as with most trusts, the primary goal is to minimize the amount of income tax that must be paid. How does this occur? When the beneficiary of a rabbit trusts starts to receive distributions, they are presumably retired. As such, they are in a lower income tax bracket and any distributions received will be taxed at a lower rate. This occurs in much the same way as it would for a retired person receiving distributions from a traditional 401(k).

Consider contacting an experienced attorney to learn more about wills, trusts and other complex estate planning options here in Minnesota.

Source: Forbes, "Six trusts for the person who has everything else," Wendy Goffe, Jan. 2, 2014

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