If you thought that all trusts were created equal, you might want to think again. There is actually great variety in the world of personal trusts, and some are better suited for certain situations than others. If you are looking into setting up a trust, some types you might encounter include:

The main reason people choose to establish this kind of trust is to provide for themselves if they become incapacitated and to avoid probate when they die. It allows you to control if and when to change or revoke the trust. In effect, you can establish the trust and control it, including serving as or selecting the trustee. If you become incapacitated, the trustee (or successor trustee) will ensure uninterrupted management of your financial affairs according to the terms you established when you set up the trust. And when you are gone, the trustee will distribute the trust assets, which will not be subject to the delays and expense, not to mention potential public review, of the probate process.

A revocable living trust does not avoid estate taxes because you still own the property, but it can help reduce expenses.

An irrevocable trust is just what the name implies and cannot be revoked by the grantor once it has been created. Because it is irrevocable, this type of trust may provide tax savings benefits that a revocable trust cannot, by reducing the estate's tax liability. It can also provide income to your children, grandchildren, or other heirs as you instruct. You specify the beneficiaries of the trust, how it will function, and who will serve as trustee.

An irrevocable life insurance trust lets you reduce the size of your taxable estate with a trust which purchases a life insurance policy on your own life. The trust is the owner of the policy and pays the life insurance premiums from money you gift to the trust. The trust is also the beneficiary of the policy and your heirs are the beneficiaries of the trust. When you die, the policy's death benefit is paid to the trust, and the trust can be distributed to the named beneficiaries.

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Although your estate can generally pass to your spouse estate tax-free upon your death, you may choose to establish a family or exclusion trust to take advantage of the applicable exclusion amount at the first death of a spouse. This type of trust can provide a lifetime of income to the surviving spouse, with the remaining assets of the trust passing to your heirs estate tax-free upon the surviving spouses death.

With a charitable remainder trust, you reap the benefits of reducing your taxable estate and providing income to the trust's individual beneficiaries (yourself, your spouse, children, etc.). When the trust ends after a specified time or when the last beneficiary has died, the remainder of the trust passes to the qualified charity or charities you designated.

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You set up testamentary trusts in a will, which will take effect when you die. For example, you might have a child with special needs who will require income and care after you are gone. With a testamentary trust, you can direct how the trust money should be spent, or you can give the trustee discretion to use the money in the most appropriate fashion. Because a testamentary trust is part of a will, the assets must go through probate.

These are just a few of the most common types of trusts. There are a great many options available if you think that a trust may be appropriate for you. Don't try to go it alone, though. The laws on trusts are complex, and you will benefit from the assistance of a professional trust advisor and attorney to set up the trust and determine what's right for your situation.

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