And when to use each one.
A revocable trust can be changed; an irrevocable trust typically cannot
A testamentary trust is created upon your death while a living trust is created while you're alive
Special types of trusts can offer asset protection and minimize estate tax but may require a lawyer to set up
Most but not all types of trusts can help you avoid probate
There are many different types of trusts, each suited to unique purposes. Choosing the right one depends on what you're trying to achieve with your estate plan. When comparing different types of trusts you might ask yourself some questions, like how much flexibility or control you want over it. Some types of trusts are easy to change or revoke (close), while others can't be revoked except under narrow circumstances. You can create a trust during your lifetime or even have one opened upon your death through your will. Most but not all types of trusts can help avoid probate. (Unlike wills, which must be proved in court, assets in a trust transfer directly to their beneficiaries.) Special types of trusts can do a lot more — like minimize estate tax, provide asset protection, or create a stream of income for your surviving spouse or family members.
Contrary to popular belief, you don't need to be fabulously wealthy to open a trust, but since it costs money to open and maintain it, creating the right type of trust to begin with can help you save money and headaches in the long run.
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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.
You can read more in-depth about how a trust works, but here is a primer:
The grantor (or settlor or trustor) creates the trust and moves assets into it (funding the trust).
A trustee manages the trust.
A beneficiary receives the trust assets.
The trust document contains rules and instructions about how the trust works, including the names of the people appointed to the roles listed above.
After the grantor dies, the beneficiaries typically receive the trust assets outside of probate. Although probate is nothing to worry about, it can sometimes drag on for a long time if there are contests to the will. (Learn more about trusts vs wills.)
All trusts fall into one of two categories: revocable or irrevocable.
A revocable trust is one that you can change or revoke. It offers flexibility to move assets in and out of the trust and can be useful in conjunction with a will to pass high value property, like a house, quickly to beneficiaries. You can create a will and revocable trust using the Policygenius app.
See a guide to revocable trusts.
An irrevocable trust cannot be modified once it’s created, except under narrow circumstances. In exchange for leaving the trust as it is, the irrevocable trust offers benefits that a revocable one does not, like asset protection from creditors and a potential reduction in taxes.
Property and assets in a properly structured 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, their income tax liability, or the value of their estate. Very wealthy estates — valued over $11.7 million in 2021 and $11.58 million in 2020 — must pay federal estate tax.
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 lawyer like an estate planning attorney to properly set up this type of trust.
See a guide to irrevocable trusts.
Here are the most common types of trusts that you may encounter during estate planning. Keep in mind that a trust can be more than one type; this may happen if you have a complex estate and need your trust to accomplish a few different things.
This type of trust is created after you die through instructions contained within your will; the transfer of assets cannot happen until the validity of the will has been proved in court. Testamentary trusts are irrevocable by nature since the grantor is dead and can't change it. Testamentary trusts might work for you if you’re looking for a more cost-effective way to establish a trust. It can save money since you won’t need to maintain it while you’re alive.
Learn more about testamentary trusts.
A living trust, or inter vivos trust, is created during the grantor’s lifetime. (Any trust that is not a testamentary trust is a living trust.) You can open a revocable living trust or an irrevocable living trust. If you want to have more control over your assets and ensure they get to the right people, you might consider a living trust.
Open a revocable living trust with the Policygenius app.
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", also called a credit shelter trust, helps minimize estate tax.
Learn more about bypass 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.
A family trust is simply a trust that is structured to pass property and assets to your family members. The grantor typically designates a family member or relative as the trust beneficiary.
Learn more about family trusts.
This type of irrevocable trust allows very wealthy estates to avoid paying estate tax more than once. The beneficiaries of the trust are typically the grantor’s grandchildren.
Learn more about generation skipping trusts.
When two people both fund a trust and act as co-trustees this is called a joint trust. Spouses who live in a community property state and want their assets to be handled the same way can benefit from including this type of trust in their estate plan.
Learn more about joint trusts.
An irrevocable life insurance trust (ILIT) is specifically intended to hold a life insurance policy. Life insurance proceeds are typically not taxed as income, but the value of the death benefit is ultimately includable in the gross valuation of the deceased's estate — which means estate tax may be due if the estate is worth a lot. With an ILIT, the grantor designates the life insurance trust as the owner and the beneficiary of the life insurance proceeds to minimize potential estate tax burden.
Learn more about irrevocable life insurance trusts.
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 the value of your assets from being counted towards the resource limits.
Learn more about Medicaid trusts.
A qualified terminable interest property trust (QTIP trust) is a more restrictive version of a marital trust that allows someone to provide trust income for their surviving spouse and 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 (bypass trust).
_Learn more about QTIP trusts.
A special needs trust is created for a trust beneficiary who has a disability so they can retain eligibility for government programs. A grantor can leave an inheritance for a child with special needs and the trust assets will not disqualify the child from receiving benefits like Supplemental Security Income (SSI) and Medicaid. An adult can also open their own special needs trust, which is most commonly done with money from a settlement.
Learn more about special needs trusts.
You can use this type of trust to restrict a beneficiary’s access to trust assets. A spendthrift trust is irrevocable and comes with a special provision or clause providing asset protection. If your spendthrift son, whom you designate as the trust’s beneficiary, owes money or faces a lawsuit, the trust assets cannot be used to pay for these debts.
Learn more about spendthrift trusts.
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Elissa Suh is a personal finance editor at Policygenius in New York City. She has researched and written extensively about finance and insurance since 2019, with an emphasis in esate planning and mortgages. Her writing has been cited by MarketWatch, CNBC, and Betterment.
Elissa has a B.A. in Film Studies from Barnard College.
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