Although a will is an important part of your estate plan, it cannot help to reduce your estate taxes. In order to minimize the tax burden upon your death, you must rely on trusts. Some trusts, such as a trust for your children, are included in your will. This is known as a "testamentary trust," since its terms and parameters are actually set out in your will. Others, such as a life-insurance trust, are drawn up separately in conjunction with your estate plan and are considered "living trusts", because they are created while you are alive. A living trust can be revocable, subject to termination or modification at any time for any reason,or irrevocable, meaning you can never change or terminate it, or withdraw assets, even in an emergency.

Trusts are legal entities in which one person, the trustee, holds a specific amount of money or property for the benefit of another (the beneficiary). The trustee decides whether and when any money can be taken from the trust and dispersed to the beneficiary. This is usually done within certain parameters set by your will or trust instrument.

It is important to note that trusts require the transfer of your assets into the trust, so they are usually only useful when you have a large estate that will be subject to estate taxes. For 2005, the amount of the estate tax exemption is $1.5 million. For 2006 to 2008, it become $2 million. In 2009, this amount becomes $3.5 million and in 2010, there is no estate tax to worry about. Of course, for these amounts to matter, you would have to die in one of those years. Unfortunately, in 2011, the tax exemption returns to $1 million unless changed again by Congress. In any case, if your assets will be less than $1 million, you probably don't need to worry about establishing a trust, or you might consider just the simple living trust.

If you will have a large estate, there are numerous trusts to be considered, depending on your situation and your goals. The following provides some basic information on various types of trusts.

Simple living trust. As an alternative to a will, a simple living trust is an effective way to distribute property at your death without involving the time and cost of probate, but it will not save you any money on your taxes. A living trust is a document that includes the trust terms, and involves transferring all or most of your assets into the trust. You still own the property and can buy, sell or give away it away as you want. Upon your death, the trust then provides for the distribution of your assets to your beneficiaries in much the same manner as a will. A successor trustee that you name in the trust agreement carries out the remaining trust duties, similar to how an executor would handle your estate under a will.

Marital deduction and bypass trust (A/B trust). If you are married, and your combined estate will exceed $1 million, but probably not $2 million during your lifetime, you will want to create a marital bypass or A/B trust. This involves hiring an estate-planning attorney to draw up two different trusts, one for each spouse. When the first spouse, say the husband, passes away, his will dictates that his trust be "funded". This means that an amount equal to his estate tax exemption will be transferred into the trust after his death. The spouse can collect any income the trust generates. When the wife also passes away, her trust is funded and the heirs can now collect up to $2 million (or whatever the exemption amount is that year) tax free. The marital bypass trusts are irrevocable, meaning they cannot be undone once they are funded.

QTIP trusts.If you have more than one family, such as kids from a first marriage and a current wife you'd like to take care of as long as she lives, then you should consider a QTIP trust. QTIP stands for qualified terminable interest property and it works like this: When you pass away, the first $1 million (or whatever the exemption is) of your estate moves into your marital trust, leaving the balance behind. Rather than passing directly to your new wife, the leftover balance goes into the QTIP trust, which is designed to provide her with income until she dies. Then the kids inherit the QTIP trust.

Life insurance trusts. While life insurance payouts aren't subject to income tax, if you own the policy on your life, then it's part of your estate, and will be taxed that way. The solution is to make sure your insurance policy is owned by an irrevocable life insurance trust. If you already have the policy, you transfer ownership to the trust. If you haven't yet gotten the policy, you have the trust buy the insurance policy. You have to live three years beyond the transfer of the insurance policy to the trust for it to be considered valid.

Crummey trusts. This trust takes its name from the court decision in the case of Mr. Crummey versus the IRS. The intent is to create an estate for survivors, through annual gifts, made in a way that discourages the beneficiaries from spending the gifts immediately. The simple way to do this is to make outright gifts, and just tell the recipients that you wish the money be saved for college, for example. Sometimes, however, you will many gifts to make over the years to many people, and you lack confidence that these wishes will be consistently honored by all. In this situation, the Crummey Trust is often used.

First, annual gifts are a great way to slowly reduce the taxable estate, while passing along wealth to the next generation. As long as the gifts are made in $12,000 (or less) "chunks" that qualify for the annual estate and gift tax exclusion, none of the estate owner's $1.5 million tax shelter is wasted on them, so it can be saved for use at death. More total wealth is thus protected from tax. Secondly, when the gifts pay for insurance on the estate owner's life, the ultimate benefit to the children can be far greater than the amount given, because the policy proceeds at death might be more than the premium dollars paid to that point. For this reason, the Crummey Trust is commonly used as part of the estate owner's life insurance plan, although it does not have to be.

Gifts made to the trust are irrevocable. The Crummey Trust beneficiaries are given a short period of time each year (e.g., 30 days) in which they are permitted by the Trust document to withdraw the gift money from the Trust, free and clear, for completely unrestricted use. Unfortunately, to qualify for tax exemption, the right to withdraw the gift must not be illusory, and the Crummey Trust beneficiaries must be formally advised of it in a letter each year.

Charitable remainder trust (CRT). Here, you have a charitable motive and want a big current income tax deduction, too. Often, however, you do not want to give up all benefit of the property to be donated. If you need lifetime income, a CRT, which is irrevocable, can be an extremely useful tool.

In the most basic form of CRT, called a Charitable Remainder Annuity Trust (CRAT), a pre-selected, fixed dollar payment is made from the Trust to you each year for life, or for a certain term of years, with the remainder (i.e., the left over Trust principal) to a charity or educational institution at your death. In a more commonly used variation, called a Charitable Remainder Unitrust (CRUT), you receive a fixed percentage of the Trust's value each year, rather than an unchanging dollar amount. The CRUT is often preferred because it can provide inflation protection: As the Trust (presumably) grows in value each year, so, too, will the dollar amount of your annual draw.