Trusts can have many benefits. Learn how to choose the right type of trust for any situation, so you can protect your assets—and your legacy.
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by Carolyn Albee
Carolyn has been a freelance writer for 15 years, covering a variety of legal topics, from personal injury to crimina...
Legally reviewed by Allison DeSantis, J.D.
Allison is the Director of Product Counsel at LegalZoom, advising and providing leadership to internal teams on the d...
Updated on: October 30, 2024 · 16 min read
You’ve worked hard to earn what you have in life. You may be aware that you need a will to transfer your valuables to your loved ones when you pass—but have you also considered the different types of trusts you could set up instead?
Trusts can help minimize estate taxes upon your death. And just like a will, they also ensure your assets are distributed according to your wishes. But trusts aren’t one-size-fits-all. Finding the right type of trust can make all the difference when it comes to protecting your assets—and your legacy.
A trust is a legal arrangement where one party holds, manages, and distributes assets for another party. You might create a trust to manage your estate, minimize estate taxes, protect assets from creditors, provide care for your loved ones, or ensure your assets are distributed properly after your death. Trusts are a structured way to control your assets, providing you with flexibility and peace of mind.
As we dive into the different types of trusts, there are a few key terms to keep in mind. First, we’ll talk about the parties involved, then the two main types of trusts: revocable trusts and irrevocable trusts. Finally, we’ll list some of the most common types of trusts.
The grantor, sometimes known as the settlor or trustor, creates the trust. They set the trust terms, outlining how the property will be managed and distributed, and transfer assets into it. Essentially, everything starts with the grantor: They decide the trust's purpose, the assets involved, and the beneficiaries who will benefit from it. They also name the trustee.
The trustee is responsible for managing trust assets according to the grantor's instructions. They have a fiduciary duty to the beneficiaries, which means they have to act in the beneficiaries’ best interests. The trustee handles investments, distributes money from the trust to the beneficiaries, and oversees the trust based on the terms.
The grantor names the trustee when they set up the trust during the estate planning process. Typically, the grantor is also the trustee until they can no longer fulfill their duties (either due to disability or death). They’ll name a successor trustee who will take over the role when that happens.
The beneficiary is the person or organization that receives the benefits from the trust. They might receive income, property, or other assets as specified by the trust's terms. The beneficiary's rights are protected by the trustee, who must act in their best interests and follow the grantor's instructions. Beneficiaries can be individuals or organizations.
The property in a trust includes any assets the grantor places into it. This can be real estate, money, stocks, bonds, or other valuables. The trustee protects assets according to the grantor's wishes, which might include managing real estate or investing earnings. Properly managed trust assets can provide ongoing benefits to the beneficiaries.
A revocable trust, commonly referred to as a revocable living trust, is one that the grantor can alter or revoke at any point during their lifetime. Living trusts allow you to make changes to the terms of the trust, for example, due to divorce or remarriage, or if you acquire new assets. You can set it up so that it automatically converts to an irrevocable trust upon your death.
An irrevocable trust is when the grantor permanently transfers assets into the trust. With these types of trusts, you can’t change the terms or eliminate the trust without the beneficiaries’ consent. You also no longer own the trust assets—they move out of your estate and into the ownership of the trust. You can set up irrevocable trusts during your lifetime, or you can use your will to create trusts that take effect after your death, known as testamentary trusts.
Marital trusts are an estate planning tool that’s used to transfer assets to a surviving spouse while providing tax benefits and control over the eventual distribution of those assets. They give the surviving spouse financial security, while also providing for your other beneficiaries after that spouse’s death.
An AB trust, also known as a bypass or credit shelter trust, splits into two parts upon the death of the first spouse. The "A" trust benefits the surviving spouse, and the "B" trust shelters assets from estate taxes by using the deceased spouse’s estate tax exemption. Assets in the "B" trust can be used by the surviving spouse for their lifetime, with some restrictions. Upon the second spouse’s death, the assets in the “B” trust are distributed to its beneficiaries—usually their children.
While this type of trust protects assets from estate taxes on the death of the first spouse, the assets don’t become part of the surviving spouse’s estate, so they’ll be subject to taxes upon that spouse’s death.
A qualified terminable interest property (QTIP) trust is one of the most common testamentary trusts. You transfer assets, known as the principal, into a trust that’s enacted upon your death. Your surviving spouse receives income from these assets for their lifetime—for example, dividends from investments or rent from real estate properties. When the surviving spouse passes, the principal assets then pass to the beneficiaries.
The requirement to distribute all income to the surviving spouse—and their inability to access the principal—might not suit all financial situations. Still, these types of trusts are popular, especially for second marriages when both spouses have children from previous marriages and also for the capital gains tax savings they can provide.
Charitable trusts allow individuals to support their beloved causes while also benefiting from potential estate tax advantages. If you want to leave a lasting legacy, these types of trusts could be for you.
A charitable remainder trust (CRT), also called a charitable remainder annuity trust, is designed so that the grantor (you), or beneficiaries (for example, your children) receive the income generated by the trust assets during your lifetime or for a certain period of time.
Upon your death or the end of the trust term, the assets transfer to the charity of your choice. Charitable remainder trusts provide many tax benefits for the principal assets, including capital gains tax avoidance. However, the income that the trust generates may be subject to taxes.
A charitable lead trust (CLT) is similar to a CRT, but it works in the reverse order: It provides income to a charity for a set period, after which the remaining assets go to your beneficiaries. While it provides estate and gift tax benefits when you set it up, there might be tax implications for your beneficiaries once it passes to them.
Many people start thinking about estate planning because they want to provide financial support and protection for loved ones who have unique needs or circumstances. These types of trusts provide security for the beneficiaries and peace of mind for the grantor.
When your loved ones inherit your assets through a will or a gift, those assets become a part of their estate and increase their personal net worth. That can jeopardize their eligibility for government benefits—for example, supplemental security income for a disabled person.
A special needs trust (SNT) avoids these disadvantages because the assets held in these trusts don’t become part of your loved one’s estate, so they don’t increase their net worth. When you set up the trust, you’ll also outline how the funds must be used, so you can make sure they’ll support your loved one.
Sometimes you want your loved ones to receive your assets, but you might not have confidence they’ll spend their inheritance wisely. That’s when you’d create a spendthrift trust.
These trusts are nearly the same as traditional trusts, with one important legal difference: The beneficiary does not become the owner of the assets. Instead, the trust itself owns the assets, and the trustee distributes the funds to the beneficiary according to terms you set. Another important benefit is that because they don’t own the assets, the beneficiary also can’t use them as collateral for loans.
A generation-skipping trust (GST) bypasses your children, benefiting your grandchildren or even later generations. While this helps minimize estate taxes, the trust assets are generally still subject to a Generation-Skipping Transfer Tax. You also can’t use this type of trust to pass assets to a surviving spouse, even if they’re younger than you. Still, they’re an important part of estate planning for those who want to preserve family wealth in the long term.
Grantor-retained annuity trusts (GRAT) allow you to transfer assets into a trust while also receiving payments from the trust. You’ll receive fixed annuity payments for a specified term. When that term ends, the assets transfer to your beneficiaries, who receive a gift tax exemption and estate tax exemption.
GRATs are used to minimize estate and gift taxes on appreciating assets like real estate, stocks, and bonds. They’re especially popular with individuals who have stock in valuable startups. For instance, Facebook founder Mark Zuckerberg put his personal company stock into a GRAT before the company went public, and he’s certainly seeing the benefits.
Grantor-retained income trusts (GRITs) are similar to GRATs, but instead of receiving a fixed annuity, you’ll receive the income generated by the trust for a specified period. Another important difference is that at the end of the term, the assets in a GRIT can’t go to your close relatives, including children and surviving spouses.
As you dig into the different types of trusts, you’ll find there’s one for nearly any situation. Whether you want to protect assets from legal claims or make sure they’re used for a specific purpose, the following specialized trusts can help.
Asset protection trusts (APTs), also called self-settled spendthrift trusts, are unique in that you can be both the grantor and the beneficiary. This type of trust must be irrevocable, so that you no longer own the assets, and discretionary, which means the trustee fully controls the distributions. It also must have a spendthrift clause, which prevents you from spending or borrowing against the trust assets.
When properly set up with the right legal language, APTs provide the best asset protection from creditors. However, there are only 17 states that allow APTs, although you can also set them up offshore. They’re also expensive to set up, so they’re typically used by high-net-worth individuals and those in high-risk professions.
Qualified personal residence trusts (QPRTs) are specifically for primary or secondary residences. They allow you to transfer property into the trust but retain the right to live in the home for a certain period of time. As the owner, you still own some of the value of the home. This lowers the gift tax when it passes to your beneficiaries upon your death or the end of the term. QPRTs also transfer ownership of the home without going through the probate process.
An irrevocable life insurance trust (ILIT) puts your life insurance policy into a trust. Upon your death, the life insurance proceeds won’t be a part of your estate, which helps minimize taxes.
You can also draft the trust to ensure that the proceeds will be used to pay your debts and expenses. For example, if you own a business whose value exceeds the federal estate tax exemption, it will be subject to taxes after your death. With an ILIT, your beneficiaries can use the life insurance proceeds to help pay off those estate taxes when the business passes to them.
A land trust is just what it sounds like: You transfer your land and real estate into a trust. The trust holds the title to the real estate, which keeps ownership details private and passes management onto the trustee, while allowing you to retain control of major decisions.
This is one of the best types of trusts if you want to protect real estate from judgments or keep your future development plans private. They’re generally revocable trusts that become irrevocable upon your death, which also protects the property from the probate process.
More and more people are including their pets in estate planning. A pet trust ensures that your beloved pet is cared for financially after your death. It’s set up as a standard trust, but you specify that the funds are to be used for the pet's care, appoint a caretaker (which can be different from the trustee), and provide instructions for the pet's wellbeing. The trustee is responsible for distributing the funds and making sure the pet receives good care.
A funeral trust is also like a standard trust, with terms that specify the funds are to be used for funeral and burial expenses. You’ll transfer assets such as cash, stocks, and bonds into the trust and appoint a trustee, which is often the funeral home of your choice. You get peace of mind knowing that your funeral costs are covered, and your loved ones don’t have to worry about this financial burden.
Choosing the right trust depends on your specific needs and goals. An estate planning attorney can review the different types of trusts with you so you can make an informed decision. During the process, you’ll consider the following things:
Determine your financial objectives and the types of assets you own. If you want to minimize estate taxes and manage high-value assets like real estate, a qualified personal residence trust (QPRT) might be suitable. For protecting liquid assets like a business, an irrevocable life insurance trust (ILIT) can be advantageous. Your attorney will help you outline your goals and identify all of your assets so you can pick the best trust.
Consider your family structure and the unique needs of your beneficiaries. AB trusts and QTIP trusts are important if you’ll have a surviving spouse. For beneficiaries who might be financially irresponsible, a spendthrift trust can provide controlled distributions. Your attorney will want to understand your family's dynamics and needs so they can tailor a trust that fits.
Some of the biggest benefits of trusts are minimizing estate taxes and protecting assets from taxes, judgments, and creditors. Irrevocable trusts often have the best tax benefits and creditor protection. However, setting up a testamentary trust or a revocable trust that automatically converts into an irrevocable trust upon your death can provide the best of both worlds. Your attorney can help you weigh the trade-offs between control, tax savings, and legal protection and find an arrangement that you’re comfortable with.
Protecting your legacy with a testamentary trust or living trust is an important part of the estate planning process. Getting expert advice from an experienced attorney is just as important. They can help you choose the best types of trusts based on your individual circumstances.
A professional can also help you do the following:
Estate planning advice from LegalZoom is designed to be fast, personalized, and affordable. You get dedicated attorney support for a simple flat fee, while your loved ones get peace of mind knowing that your estate is protected—and that’s the biggest benefit, no matter what type of trust you choose.
The major types of trusts are revocable trusts (also called living trusts), testamentary trusts, and irrevocable trusts. Revocable trusts can be changed, but irrevocable trusts can’t be altered once established. Testamentary trusts are established after your death through your will.
To protect assets, you typically need an irrevocable trust. This type of trust removes your ownership of the assets, making them less accessible to creditors and shielding them from certain taxes.
It depends on the type of trust, the size of the estate, and tax laws in the state where the trust is made. Beneficiaries might have to pay income tax on distributions received from the trust's income.
Irrevocable trusts usually have to file tax returns if they earn income. The trust itself may pay taxes on its income, or it may pass the income to beneficiaries, who then pay the taxes. The specific filing requirements depend on the type of trust and the amount of income earned.
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