Types of Trusts

trust is a legal document that creates a virtual container for money and property. These assets are managed by a trustee (an institution or person) for the benefit of another (the beneficiary). The person who sets up the trust and funds is called a grantor, trustor, or donor.

A trust is a legal document that creates a virtual container for money and property. A trustee (an institution or person) manages assets for the benefit of another (the beneficiary). The person who sets up the trust and funds is called a grantor, settlor, trustor, or donor.

Once the grantor transfers ownership of an asset to the trust, that asset belongs to the trust itself, not to the trustee. However, the trustee still holds the title to the trust property.

The trustee holds the trust property for the trust beneficiaries' benefit. The trustee cannot do whatever they want with the trust's assets. They must follow the terms of the trust document. As a fiduciary, the trustee must look to the best interests of the beneficiaries.

Primary Goals of a Trust

Different types of trusts will accomplish distinct goals. Some people create trusts for tax purposes. Trusts transfer assets to heirs and beneficiaries while minimizing or eliminating estate taxes. There are trusts used solely by married couples, trusts that benefit certain types of people (and pets), and trusts that benefit charities and nonprofit organizations.

Common Types of Trusts

Common types of trusts fall into four categories. The trusts discussed below will be placed into two (or more) of these categories:

  1. Inter vivos trusts or living trusts: Created and active during the lifetime of the grantor
  2. Testamentary trusts: Trusts formed after the death of the grantor
  3. Revocable trusts: Can be changed or revoked entirely by the grantor
  4. Irrevocable trusts: Can't be changed or revoked by the grantor once they are implemented

Revocable Living Trusts

A grantor creates a revocable living trust (inter vivos trusts) during the grantor's lifetime. They can be modified or revoked entirely at the instruction of the grantor.

The grantor often serves as the initial trustee. They can transfer property into the trust and remove property from the trust during their lifetime. A revocable trust becomes an irrevocable trust upon the death of the grantor.

Pros of a Revocable Living Trust

  • Assets held in the trust at the time of death avoid the probate process. They can be distributed immediately.
  • Assets held in trust do not go through a probate court process. The trust remains private. It is not a matter of public record. Using a pour-over will transfers any un-transferred assets into the trust after death. However, assets subject to the pour-over will go through probate first.
  • It minimizes the value of the taxable estate because assets held in trust are not part of the deceased's estate.
  • It ensures financial privacy after death.
  • It allows a trustee or successor trustee to manage assets if the grantor becomes incapacitated.
  • It is less costly to create than many other types of trusts.
  • In community property states, the trust's inheritance is a separate asset of the beneficiary. It only becomes part of community property if the beneficiary makes it so.
  • It allows the grantor to control how and when beneficiaries receive their inheritance.

Cons of a Living Trust

  • A revocable trust does not provide asset protection. Because assets remain available to the grantor, they also remain available to the grantor's creditors.
  • If needed later in life, a revocable trust may interfere with the grantor's ability to access Social Security/Medicare assistance with long-term care expenses.

Example of a Revocable Trust: Totten Trusts

A "Totten trust" is also called a "poor man's trust." There is usually no written trust document with a Totten trust, and it often costs the trust maker nothing to establish.

A Totten trust is created during the lifetime of the grantor by:

  • Depositing money into an account
  • Having the grantor named as the trustee
  • Having the beneficiary be another individual or entity

A Totten trust uses financial institutions for bank accounts and certificates of deposit. A Totten trust cannot be used with real estate.

To create a Totten trust, the title on the account should include "In Trust For," "Payable on Death To," or "As Trustee For." It may also use the identifying initials for each: "IFF," "POD," or "ATF." If this language is not included, the beneficiary may not be identifiable.

The gift is not completed until the grantor's death or until the grantor passes along the account as a gift during the grantor's lifetime. Until then, the beneficiary cannot access the money. Totten trust assets avoid probate and gift taxes.

Irrevocable Trust

A grantor can create an irrevocable trust during the grantor's lifetime, also called an inter vivos trust, or after death. Once the grantor transfers assets and property into an irrevocable trust, the grantor cannot take them out of the trust.

A trustee who is not the grantor manages the trust. Often the trustee is a financial professional or a business.

Pros of an Irrevocable Trust

  • Assets held in the trust at the time of death avoid the probate process. A pour-over will transfer assets after death. Assets can be distributed immediately.
  • It reduces and can even eliminate the cost of wealth transfer, such as probate fees, gift taxes, and estate taxes.
  • It ensures financial privacy after death.
  • Because assets in an irrevocable trust are unreachable to the grantor, they are also unreachable to the grantor's creditors and cannot be taken should the grantor lose a lawsuit.
  • The grantor controls how and when beneficiaries receive their inheritance.
  • In community property states, the inheritance provided by the trust is a separate (not community) asset of the beneficiary and does not become part of community property unless the beneficiary makes it so.

Cons of an Irrevocable Trust

  • A grantor cannot change the trust once implemented. Beneficiaries named in the trust will remain beneficiaries. Terms in the trust will remain the same even though the beneficiaries may have experienced changes in their lives.
  • The grantor cannot access trust assets if they need them later.
  • Irrevocable trusts are more costly to create than a living trust and require legal help.

Example of an Irrevocable Trust: Irrevocable Life Insurance Trusts (ILIT)

An irrevocable life insurance trust, also called an ILIT, owns the life insurance policy of the grantor. The trust pays the life insurance premium each month, although the grantor funds the trust to make the payments. The grantor's estate is reduced in value as it transfers money to the trust to make these payments.

Usually, when a life insurance policy pays out, the named beneficiary receives a lump sum. The beneficiary's creditors could seize that money, get a beneficiary kicked off government assistance or Medicaid, or be wasted if the beneficiary is not good at handling money.

Depending on the terms of the trust, an ILIT can distribute insurance money immediately, or the ILIT can hold and manage the money and distribute it over a period of time.

Trusts for Married Couples

Most people assume that the surviving spouse inherits everything when one spouse dies. Everything passing to the surviving spouse's estate is not always the case. Ensuring the remaining spouse is cared for is one reason why married couples choose to establish a marital trust.

When a couple chooses to set up a trust fund, they have two immediate decisions to make:

  • Whether to set up a joint trust or separate trusts
  • Whether the trust is just to transfer assets to the surviving spouse or whether it should also transfer assets to remaining heirs after the death of the second spouse

A joint marital trust is a single trust that covers both members of the couple. It transfers assets between the two spouses and no one else. It is less complicated to set up and maintain and less costly to create.

Separate Marital Trusts: AB Trusts and QTIP Trusts

Separate marital trusts, in particular AB trusts and QTIP trusts, offer some additional benefits:

  • Both spouses can pass along assets to separate heirs, as well as the surviving spouse.
  • The surviving spouse has use of marital assets and property for the remainder of their lifetime.
  • The deceased spouse's trust becomes an irrevocable trust upon death, which offers greater protection from creditors.
  • While trust assets pass to the surviving spouse tax-free, when the surviving spouse dies remaining assets over the $11.2 million federal estate-tax exemption limit would be taxable to heirs. The second spouse can double their federal estate tax exemption through the use of a credit shelter trust (CST). The amount of this tax exemption limit is only in effect through 2025.

How Does an AB Trust Differ From a QTIP (Qualified Terminable Interest Property) Trust?

The marital estate is split in two upon the first spouse's death. The "A part" of the trust is a survivor's trust, which the surviving spouse can use as they see fit. The "B trust" is a bypass trust (or a credit shelter trust) that will transfer assets to heirs.

With an AB trust, the surviving spouse has some access to funds in the B portion of the trust, although they cannot change the terms of the B trust. The surviving spouse may be able to use funds for health, education, or to keep a particular living standard. After their death, funds from the B trust and the remaining funds from the A trust are passed on to the couple's heirs.

A QTIP trust is often preferred when one or both spouses have children from a prior marriage and want to ensure their inheritance. The surviving spouse has their own trust but can only access the interest income from the B trust, none of the principal. The principal fully transfers to the heirs upon the second spouse's death.

Trusts That Benefit Specific Types of People

Sometimes, you may want a trust that benefits a unique circumstance. Typically this involves a minor or loved one with special needs, seeking to skip a generation, or controlling how the inherited money is used.

Special Needs Trust

Ordinarily, when a person receives government benefits like Medicare or Medicaid, an inheritance or financial gift could negatively impact their eligibility to receive such benefits.

Social Security rules allow a disabled beneficiary to benefit from a special needs trust, as long as they are not the trustee. They cannot control the amount or the frequency of trust distributions and cannot revoke the trust. Usually, a special needs trust has a provision that terminates the trust in the event that it could be used to make the beneficiary ineligible for government benefits.

Benefits of Special Needs Trusts

Special needs trusts can be used to provide for the comfort and happiness of a disabled person when any public or private agency is not providing those needs. The list is quite extensive and includes, but is not limited to:

  • Medical and dental expenses
  • Education, transportation (including vehicle purchase)
  • Computer equipment
  • Vacations
  • Movies
  • Money to purchase gifts
  • Payments for a companion
  • Other items to enhance well-being

Parents of a disabled child can establish a special needs trust as part of their general estate plan and not worry that their child will be prevented from receiving benefits when they are not there to care for them. Disabled persons who expect an inheritance can establish a special needs trust, provided that another person or entity is named trustee.

Generation-Skipping Trust

generation-skipping trust transfers assets from grandparents to grandchildren, or other persons at least 37 1/2 years younger than the grantor. A grantor cannot use the trust to transfer assets to a younger spouse.

It bypasses the prior generation in order to avoid estate taxes. Under the 2017 tax law changes, the tax exemption for this trust doubled, to $11.2 million for singles and $22.4 million for married couples. It will revert back to $5 million in 2026.

Spendthrift Trust

A spendthrift trust is an ordinary trust intended to transfer and protect assets, but it has one particular feature suited to a particular type of beneficiary. Typically, an heir can use their interest in the trust as collateral for loans. With a spendthrift trust, that is not allowed.

Not everyone can manage a sudden influx of money. A grantor may choose to set up a spendthrift trust if their beneficiary has addiction issues or has repeatedly mismanaged money.

Types of Charitable Trusts

Charitable trusts allow donors to leave all or a portion of their assets to a charity or nonprofit. A grantor can set up a charitable trust during the donor's lifetime (inter vivos) or after death (testamentary).

There are two main types of charitable trust:

  • Charitable remainder trust (CRT)
  • Charitable lead trust (CLT)

Depending on how the trust is structured it can reduce income tax, reduce or delay capital gains tax, reduce estate taxes, or reduce gift taxes.

Charitable Remainder Trust (CRT)

charitable remainder trust provides the donor with income from investing the trust assets during their lifetime. After the donor dies, a charity receives the remaining assets. The public charity or private foundation for which the trust was established receives the donation.

If the trust makes regular payments of a fixed amount, it is a charitable remainder annuity trust. If payments vary as a percentage of the trust's principal, then it is called a charitable remainder unitrust.

Charitable Lead Trust (CLT)

A charitable lead trust first pays the charity for a predetermined amount of time. When the term of the trust is complete, the remainder goes back to the donor or to their heirs.

Less Common Types of Trusts

Unique situations can call for specific types of trusts. Providing for a pet is a common reason to create a trust. You can also protect assets from creditors and pass on family guns. In some cases, the courts can rule that a trust was implied even if it was never created.

Pet Trust

Many people consider their pets to be members of the family. A pet trust sets aside financial support for a pet and the trustee is responsible for ensuring that the pet receives care that meets the terms of the trust.

Asset Protection Trust

An asset protection trust aims to insulate assets from creditor attacks. Often set up in foreign countries, the assets do not always need to be transferred to the foreign jurisdiction.

The trust is irrevocable for a certain number of years before the assets return to the grantor, provided there is no current risk of creditor attack.

Gun Trust or NFA Trust

gun trust is a revocable trust that holds title to a person or family's guns. It allows the legal transfer of ownership of guns and gun accessories, like suppressors, restricted under the National Firearms Act. These are also called NFA trusts. A gun trust can also hold title to other weapons and protect a firearm collection.

Constructive Trust

Even though a formal trust was never made, a judge can find that an implied trust existed based on the intention of the property owner that certain property is used for a particular purpose or go to a particular person. A court establishes a constructive trust.

Create a Trust Today: Find a Local Attorney

In addition to a last will and testament, a trust may be a useful estate planning tool. It may allow you to best care for your dependents and other family members.

Forming a trust is a great way to protect your family's assets and quickly transfer property to loved ones. For answers to your questions about trusts or legal help setting up a trust, talk to a local estate planning attorney experienced with trusts.

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