With all of the options out there, it can be hard to choose which trust is best for you.
Trust Point is here to help. We’ve put together this glossary to define some of the most common types of trusts and why they’re used. Continue reading to learn more about which trust is best for you.
Figuring out the best type of trust for your situation can feel like navigating a maze blindfolded. With so many options available how do you know which one will protect your assets minimize taxes, and ensure your loved ones are taken care of exactly as you wish? As someone who’s spent countless hours researching this topic, I’m here to break it down in simple terms.
The Two Main Categories: Living vs. Testamentary Trusts
Before diving into specific types let’s understand the two main categories of trusts
Living Trusts
These are created during your lifetime (also called “inter vivos” trusts). They can be either:
- Revocable – Can be changed or canceled during your lifetime
- Irrevocable – Generally can’t be modified once established
Testamentary Trusts
These are created through your will and only take effect after you die. They must go through probate, unlike living trusts.
Revocable vs. Irrevocable: The Big Decision
The most fundamental choice you’ll make is between revocable and irrevocable trusts. This decision impacts everything from tax benefits to asset protection.
Revocable Living Trusts
Best for: People who want flexibility and control while avoiding probate
Pros:
- You maintain control of your assets
- Can be modified or terminated any time
- Helps avoid probate
- Keeps your estate plan private
- Allows for management of assets if you become incapacitated
Cons:
- Offers no protection against creditors
- Does not reduce estate taxes
- Can be expensive to set up and maintain
“A revocable trust can accomplish many of the same things as a will. However, there’s one key difference,” explains Terry Ruhe, senior vice president and regional trust manager for U.S. Bank Wealth Management. “By creating and transferring your assets to a revocable trust, you can avoid the probate process that’s required for a will.”
Irrevocable Trusts
Best for: Those seeking asset protection and tax benefits
Pros:
- Assets are protected from creditors and lawsuits
- Reduces your taxable estate
- May lower estate taxes
- Can protect assets from being depleted by long-term care costs
Cons:
- You give up ownership and control of the assets
- Changes typically require beneficiary consent or court approval
- Less flexibility than revocable trusts
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren’t considered personal property. This means they’re not included when the IRS values your estate to determine if taxes are owed.
Comparison of Basic Trust Types
| Feature | Revocable Living Trust | Irrevocable Living Trust | Testamentary Trust |
|---|---|---|---|
| Created | During your lifetime | During your lifetime | Through a will, after death |
| Control | You retain full control | You give up control | Terms are fixed after death |
| Flexibility | Can be changed or canceled | Cannot be changed | Inflexible after death |
| Asset Protection | No protection from creditors | Assets are protected | No protection from creditors |
| Tax Benefits | No estate tax savings | Reduces taxable estate | May reduce estate taxes |
| Avoids Probate | Yes | Yes | No; goes through probate |
| Privacy | Keeps details private | Keeps details private | Public due to probate |
Specialized Trusts for Specific Needs
Depending on your specific circumstances, you might want to consider one of these specialized trust types:
Special Needs Trust
Best for: Families with disabled dependents who need to maintain eligibility for government benefits
This trust takes care of disabled people without keeping them from getting government aid like SSI and Medicaid. If a beneficiary wants to be eligible, assets in the trust are not counted as resources.
Charitable Trust
Best for: Those who want to support charitable causes while potentially reducing taxes
Charitable trusts allow you to donate assets to non-profit organizations while possibly getting tax benefits. There are two main types:
- Charitable Lead Trust (CLT) – Provides income to charity first, with remaining assets going to your beneficiaries later
- Charitable Remainder Trust (CRT) – Provides income to you or your beneficiaries first, with remainder going to charity
Qualified Personal Residence Trust (QPRT)
Best for: Homeowners who want to reduce estate taxes on their primary residence
You give your home to the trust with a QPRT, but you can still live in it for a certain amount of time. After that time, your beneficiaries will own it, but the gift tax value will be less than what you paid.
Asset Protection Trust
Best for: High-net-worth individuals concerned about potential lawsuits or creditor claims
These trusts shield assets from legal claims and creditors. They can be domestic or offshore, with offshore trusts typically offering stronger protection.
Generation-Skipping Trust
Best for: Wealthy individuals who want to leave assets to grandchildren while minimizing taxes
This trust allows assets to skip a generation, going directly to grandchildren rather than children, potentially avoiding multiple rounds of estate taxes.
Life Insurance Trust
People with large life insurance policies who want to keep the money out of their taxable estate are the ones who should use this.
An Irrevocable Life Insurance Trust (ILIT) owns your life insurance policy, keeping the death benefit out of your taxable estate and potentially reducing estate taxes.
Pet Trust
Best for: Pet owners who want to ensure their animals are cared for after their death
A pet trust provides for the care of your beloved animals, specifying everything from feeding schedules to veterinary care after you’re gone.
So, What Type of Trust is Really Best?
There’s no one-size-fits-all answer. The “best” trust depends entirely on your specific situation and goals. Here’s a simple guide to help you decide:
Choose a Revocable Living Trust if:
- You want to avoid probate
- You prefer to maintain control of your assets
- You want flexibility to make changes
- You’re primarily concerned with privacy and ease of asset transfer
Choose an Irrevocable Trust if:
- Asset protection from creditors is a priority
- You want to reduce estate taxes
- You’re planning for long-term care needs
- You have a large life insurance policy you want to exclude from your estate
Consider a Specialized Trust if:
- You have a disabled dependent (Special Needs Trust)
- You want to support charitable causes (Charitable Trust)
- You own significant real estate (QPRT)
- You have unique circumstances that require specific provisions
Real-World Trust Scenarios
To make this more concrete, let’s look at some typical situations:
Scenario 1: Maria is a widow with three adult children. The value of her estate is less than the federal estate tax exemption, which is about $2 million. She mostly wants to avoid probate and make sure that the transfer of assets goes smoothly.
- Best option: Revocable Living Trust
Scenario 2: John is a successful business owner with significant assets and concerns about potential lawsuits. He wants maximum asset protection and tax benefits.
- Best option: Irrevocable Asset Protection Trust
Scenario 3: David and Sarah have a child with autism who receives government benefits. They want to provide for their child without disrupting these benefits.
- Best option: Special Needs Trust
Steps to Setting Up Your Trust
- Identify your goals – Asset protection? Tax reduction? Avoiding probate?
- Consult with professionals – An estate planning attorney can help you navigate the complexities
- Choose the right trust structure – Based on your specific needs
- Fund your trust – Transfer assets into the trust (this step is crucial!)
- Review regularly – Update as your circumstances change
Common Mistakes to Avoid
- Choosing the wrong type of trust – Make sure the trust you select aligns with your goals
- Failing to fund the trust – A trust without assets is just an empty shell
- DIY approach without proper guidance – Trusts have complex legal and tax implications
- Neglecting to update your trust – Life changes require trust modifications
Final Thoughts
While an irrevocable trust offers the most asset protection and tax benefits, it might not be right for everyone due to its inflexibility. For many families, a revocable living trust provides a good balance of control and probate avoidance.
Trust planning isn’t just for the super-wealthy. It’s for anyone who wants to protect their legacy and provide for their loved ones with minimal hassle and expense. By understanding the different types of trusts available and aligning them with your specific needs, you can create an estate plan that truly works for your unique situation.
Remember, the “best” trust is the one that accomplishes YOUR goals. Take time to identify what matters most to you, and then work with qualified professionals to implement the right solution.
Have you already set up a trust, or are you still exploring your options? I’d love to hear about your experiences in the comments below!
Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Always consult with qualified legal and financial professionals before establishing any type of trust.
What is a Trust?
A trust is a legal agreement involving three parties that helps ensure your wishes are met for your assets after your lifetime. In a trust agreement, the grantor/settler creates the trust, who gives a third party, called a trustee, the ability to manage the trust property and specify how ones assets will be distributed to benefit a third party (the beneficiary).
Which Trust Is Best For You: Top 4
In this video, our financial professionals explain the differences between various trusts so you can help decide which is best for you. Or, refer to the detailed guide below to learn more.
One of the two main types of trust is a revocable trust. These types of trust allow the creator to maintain control of all assets within the trust. Once it’s established, the revocable trust creator can amend or revoke it at any time they wish.
Revocable trusts, which are also sometimes called “living trusts,” are a good way to plan your estate so that it doesn’t go through the expensive and time-consuming probate process. They also protect your privacy and make sure that your estate is ready to go smoothly if you die or become incapacitated. Unlike in a will, assets in a living trust will generally pass to heirs sooner, giving your family better financial protection in case the worst happens.
The other main type of trust is an irrevocable trust. This type of trust, unlike a revocable trust, cannot be amended or revoked and once a person places assets into it, they no longer belong to them.
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
Revocable vs Irrevocable Trusts | Which One Should You Choose?
FAQ
What is the best type of trust to set up?
Irrevocable trusts often have the best tax benefits and creditor protection. You can get the best of both worlds by setting up a testamentary trust or a revocable trust that turns into an irrevocable trust when you die.
What is the downside of an irrevocable trust?
The main downsides of an irrevocable trust are loss of control over assets, inflexibility and inability to change terms or access assets, higher taxes on trust income, and the complexity and cost of setup and ongoing administration. These problems could cause issues if the grantor’s needs or goals change or if problems with the trustee come up out of the blue.
What type of trust avoids all taxes?
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
What is the most popular trust?
A revocable living trust is one of the most popular options for estate planning. This type of trust allows you to maintain control of your assets during your lifetime, and you can modify or revoke it at any time.
What is the best type of trust?
The best kind of trust depends on your goals. Someone who is focused on avoiding estate tax or making sure their assets are outside of the reach of creditors may want to choose an irrevocable trust—even though that means they can’t change the trust, so they are limited with what they can do with their assets.
Which type of trust is appropriate?
The type of trust that’s appropriate depends largely on what you need the trust to do. 1. Marital Trusts (“A” Trust) A marital trust (or “A” trust) can be established by one spouse for the benefit of the other. The assets in the trust and any income they make go to the surviving spouse when the first spouse dies.
What are the different types of trusts?
This article explores 16 common types of trusts and how they can support the estate planning process. Living trusts are created during your lifetime, while testamentary trusts are set up through a will and take effect after death. Living trusts can be revocable (flexible) or irrevocable (fixed, with tax benefits and asset protection).
How do I choose the right trust?
Choosing the right trust starts with understanding the basics. Whether you want flexibility, asset protection, or long-term control, each trust type offers unique benefits. Use this table to compare the features of revocable living trusts, irrevocable living trusts, and testamentary trusts. During your lifetime. During your lifetime.
How can a legal professional help you choose a trust?
They can help you choose the best types of trusts based on your individual circumstances. A professional can also help you do the following: Comply with the law. Avoid potential legal pitfalls by ensuring your trust complies with the law. Legal professionals can help you avoid common mistakes like conflicts of interest or improper funding.
What are the different types of living trusts?
When it comes to living trusts, there are two main types: revocable trusts and irrevocable trusts. The key difference lies in the level of control you retain and the protections they offer. Best for: People who want flexibility and control over their estate plan.