And when to use each one.
The two main types of trusts are revocable and irrevocable
Specialty trusts can hold a life insurance policy, donate to charity, offer asset protection, and minimize taxes
Avoiding probate court and directing how your beneficiaries use your assets are major benefits of a trust
A trust is an important part of an estate plan that lets you pass property and assets to your loved ones and heirs. A person transfers assets into a trust, which are distributed to beneficiaries according to the trust maker's instructions. A major benefit of opening a trust is that it can be tailored to meet your needs and circumstances and, contrary to popular belief, you don’t need to be fabulously wealthy to create one.
Another significant advantage of a trust is avoiding probate. Unlike wills, which must be proved in court, assets in a trust transfer directly to beneficiaries since the trust operates as a separate entity. (Learn more about trusts vs wills).
There are many different types of trusts, each suited to unique purposes, and choosing the right one depends on some key factors. When comparing different types of trusts you might ask yourself some questions, like whether or not you want to be able to change the terms of the trust. Do you want to open and operate the trust while you’re alive or would you rather have it created when you pass away? (There’s a type of trust that does just that.)
Additionally special types of trusts can also help minimize taxes, protect assets from creditors, create a stream of income for your spouse or heirs, or help plan for remarriages and stepchildren.
Since you have to pay money to open a trust and also to maintain it, creating and properly setting up the right type of trust to begin with can help save money in the long-run. If you’re wondering what type of trust is best for you, continue reading our guide to all the different types of trusts.
A trust is a separate entity that holds different types of assets and property for future use by your heirs. A trust is sometimes synonymous with a trust fund, which provides a source of income or funds for your chosen beneficiaries.
Trust assets are not typically subject to the probate process, so beneficiaries can receive them must faster than they would through a will.
You can read more in-depth about how a trust works, but here is a primer on the different parts and people involved.
All trusts fall into one of two categories: revocable or irrevocable. A revocable trust is one that you can change or revoke, but an irrevocable trust cannot be modified, except under narrow circumstances. Not being able to change a trust seems like serious business, and it is — but in exchange for leaving the trust as it is, the irrevocable trust offers benefits that a revocable one does not, like asset protection and a potential reduction in taxes.
You can create a revocable trust using the Policygenius app as part of the Plus package. The Plus package also includes a will.
Property and assets in a properly set up irrevocable trust (a “non-grantor trust” as termed by the IRS) are not owned by the grantor, so they won’t factor into the grantor’s personal wealth (including income tax liability) or the value of their estate. This is important because estates valued over a certain amount — $11.58 million in 2020 and $11.7 million in 2021 — must pay the estate tax. Less than 1% of estates pay estate tax, so most people don’t have to worry about it unless they’re very wealthy.
Even if you don’t own a huge amount of wealth, an irrevocable trust can benefit you. Nearly all special types of trust are irrevocable trusts. People with more complex trusts, especially those with larger estates will probably need the help of a lawyer, like an estate planning attorney to properly set up the trust.
This type of trust is created when you die, through instructions contained within your will. Testamentary trusts do not avoid probate, since the transfer of assets cannot happen until the will have been proved, or validated, by the court. Testamentary trusts are by nature irrevocable, since the grantor is dead and can’t change it.
The opposite of a trust created upon death is one created while you’re alive — a living trust, inter vivos trust, or inter vivos living trust. You can open a revocable living trust or an irrevocable living trust.
Learn more about testamentary trusts.
Any type of trust can limit or restrict how much or what a beneficiary receives. But this irrevocable trust comes with a special provision, called a spendthrift clause, meant to protect the beneficiary from creditors. If the beneficiary owes money or faces a lawsuit, the trust assets cannot be used to pay for these debts.
Learn more about spendthrift trusts.
With a charitable trust, you can donate to nonprofit organizations while creating a steady source of income for yourself or your beneficiaries. There are two types of charitable trusts — a charitable lead trust (CLT) and a charitable remainder trust (CRT). Both allow you to qualify for an income tax deduction as well as minimize potential capital gains tax and estate tax.
Learn more about charitable trusts.
An irrevocable life insurance trust (ILIT) is specifically intended to hold a life insurance policy. While life insurance proceeds are typically not taxable, the value of the death benefit is ultimately includable in the gross valuation of the deceased’s estate. If the estate is valued over the estate tax exemption, which is $11.58 million in 2020 ($11.7 million in 2021), then it must pay a tax on the value that exceeds the exemption. With an ILIT, the grantor designates the life insurance trust as the owner and the recipient of the life insurance proceeds to minimize potential taxation.
Learn more about irrevocable life insurance trusts.
Government benefit programs typically have financial eligibility restrictions. If you don’t meet the requirements, certain irrevocable trusts can help you qualify.
In order to receive benefits through Medicaid, including long-term care coverage, the applicant must meet certain asset and income requirements. A Medicaid trust can help you qualify by shielding your assets from being counted towards the resource limits.
(Long-term care coverage is very costly, so the best way to pay for it is to plan ahead and get long-term care insurance.)
Learn more about Medicaid trusts.
A special needs trust is primarily used to help persons with disabilities retain eligibility for government benefits from programs like Supplemental Security Income (SSI) and Medicaid, which have income and resource eligibility requirements. A person can leave an inheritance for their child with special needs without having the money and assets disqualify that child from receiving benefits. A disabled adult can also open their own special needs trust funded with money from a settlement
Learn more about special needs trusts .
Family trusts are simply trusts that are structured to pass assets to family members. Here are a few more types of trusts common in estate planning that benefit families:
A bypass trust is a planning strategy that can help wealthy married couples minimize estate taxes. Also known as an AB trust, the bypass trust consists of two trusts created when one spouse dies: The “A trust”, or marital trust, holds assets for the surviving spouse, while the “B trust”, or credit shelter trust, helps minimize estate taxes.
Learn more about bypass trusts.
A QTIP trust is a more restrictive version of a marital trust that allows someone to provide income for their surviving spouse but ultimately pass the trust assets to different beneficiaries. People who are remarried or have children from previous marriages can benefit from this type of trust, which can also be used in conjunction with a credit shelter trust.
Learn more about QTIP trusts.
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Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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