Trusts have been used for years in estate plans. Because they are technical and varied, you must use trust experts to help in fulfilling proper trust plans. A trust is defined as "a legal arrangement made during life or created by a will where a property interest is held by one person or institution for the benefit of another." They are used to keep farms together as a business unit and eliminate some management problems beneficiaries might face. Testamentary trusts are those formed by a will. Lifetime trusts are revocable if you keep the right to cancel or irrevocable if there is no right to cancel.

The Tax Reform Act of 1976 placed limits on the use of "generation skipping" transfers. In the past, many estate owners would arrange for children (and sometimes grandchildren) to use an estate, but the estate would not transfer for several generations. Limits of $250,000 are placed on the amount that can transfer through each child. Transfers for more than $250,000 would be taxable as if the property passed directly to the children.

There are numerous ways of creating trusts. Life insurance trusts are organized so the trusts are the beneficiary of the life insurance policies. This effectively removes the policy from the estate if you give up all ownership rights. You can make provisions for certain heirs, and the insurance proceeds are removed from the probate estate.

The two-trust plan usually involves leaving half of the estate in a marital trust for the spouse who must have control over it for it to qualify for a marital deduction. The unlimited marital deduction lessens the need to qualify specifically one-half of the estate for this deduction. The other part of the estate is placed in a nonmarital trust, with children as beneficiaries to remove the property from the surviving spouse's estate. Usually, the major advantage of this arrangement, besides balancing the estate to reduce taxes of the surviving spouse, is the survivor does not have to make management decisions.

Qualifying terminal interest property (QTIP) is property or interest in property passing from the decedent to which the surviving spouse is given an income interest for life. To qualify, the spouse must have the right to all the income produced; income must be paid at least annually. There can be no powers of attorney (except to spouse), and the executor must treat the property as QTIP.

A QTIP, if not in trust, must follow the rules of the marital deduction trust. Use of QTIP or partial QTIP allows an executor to make wise use of the marital deduction. A marital deduction is allowed for the entire property without the surviving spouse having the authority to dispose of the property.