16 Types of Trusts Explained: Which One Is Best for You?

Planning for the future is about more than just writing a will—it’s about finding the best way to protect your legacy and care for your loved ones. Trusts offer a flexible and reliable way to do that, giving you control over how your legacy is handled.

Whether you’re worried about avoiding probate, reducing taxes, or making sure your family is cared for, there’s a trust that can meet your needs. This article explores 16 common types of trusts and how they can support the estate planning process.

What Is a Trust?

A trust is a legal way to protect your assets and provide for your loved ones. As the grantor, you place your assets in the care of a trustee, who manages them for your beneficiaries. It’s a flexible tool that ensures your wishes are followed and your family is supported.

Trusts aren’t just for the wealthy—they’re for anyone who wants to protect their assets, care for loved ones, and leave a lasting legacy. From property to investments, a trust lets you control how and when your assets are distributed, down to the smallest detail.

The best part about a trust is its flexibility. Unlike a last will, it takes effect while you’re alive, offering immediate protection and benefits. Trusts help avoid probate, protect your privacy, and ensure your assets are managed if you’re unable to. Understanding the differences between trusts and wills can help you make the right choice for your needs.

Living Trusts vs. Testamentary Trusts: What’s the Difference?

Trusts are divided into two main categories: living trusts and testamentary trusts. Understanding the difference between these two types is the first step in deciding which one best suits your needs and aligns with your estate planning goals.

Living Trusts

Also known as an inter vivos trust, a living trust is created during your lifetime and allows you to manage your assets while you’re alive. Living trusts can be:

• Revocable, meaning you can make changes or cancel the trust if your needs change.
• Irrevocable, meaning the trust cannot be altered once it’s established, but it offers benefits like tax savings and asset protection.

Living trusts help avoid probate and keep your estate plan private, but they don’t fully hide your identity. A land trust, a type of living trust for real estate, offers more privacy by listing the trust’s name instead of yours in public records. This can help protect you from lawsuits or unwanted attention, especially as a real estate owner.

Testamentary Trusts

A testamentary trust is created through your will and only takes effect after your death. It offers flexibility in how your assets are distributed, but it doesn’t protect your estate from probate. This means the transfer of cash, investments, real estate, or other property might be delayed or subject to legal fees, which can affect how quickly your beneficiaries receive their inheritance.

One key benefit of a testamentary trust is the potential to reduce estate taxes. It allows grantors to use the estate tax exemption (also called the unified credit), which is the maximum amount of assets you can transfer tax-free according to IRS rules. By taking advantage of this estate tax exemption, a testamentary trust helps preserve more of your wealth for your beneficiaries.

Understanding Revocable and Irrevocable 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.

Revocable Trusts

Best for: People who want flexibility and control over their estate plan.

A revocable living trust allows you to make changes or cancel the trust during your lifetime, as long as you are sound of mind. This flexibility makes it a popular choice for many individuals. With a revocable trust, you maintain control over the assets while you’re alive, and the trust becomes irrevocable upon your death.

If you expect certain life changes (e.g., the birth of a child) that can prompt the need to amend a trust, consider making your trust revocable for flexibility. Keep in mind that the grantor still owns the assets in a revocable trust. Therefore, they must report any revenue generated by the trust on their taxes.

What to Remember: While revocable trusts are flexible, they don’t protect assets from creditors or lawsuits.

Irrevocable Trusts

Best for: People who want to protect assets from creditors and reduce estate taxes.

Unlike a revocable trust, an irrevocable trust cannot be easily changed. Once created, the grantor gives up ownership and control of the assets placed into the trust. Any modifications, amendments, or termination of the trust require the consent of the beneficiaries or a court order. This permanence may feel limiting, but it also provides protection.

An irrevocable trust removes assets from a person’s taxable estate by transferring ownership, which can lower federal estate taxes. Additionally, these assets are shielded from creditors and lawsuits, offering a secure way to preserve wealth for your loved ones.

What to Remember: Once an irrevocable trust is created, the assets are no longer yours. Plan carefully to decide what to include.

Basic Trusts at a Glance

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.

Trusts for Specific Needs

Sometimes, a standard trust isn’t enough to meet unique goals. Whether you want to protect a child’s future, care for a pet, or shield assets from risks, specialized trusts can help with these specific situations.

Joint Trust

Best for: Married couples who want to simplify asset management.

A joint trust combines the assets of both spouses into one trust for easier management during their lifetimes and smoother transitions after their deaths. This type of trust is typically revocable until the surviving spouse passes away, allowing both partners to manage and adjust it as needed.

A joint trust is easier to manage because it combines everything into one set of documents. However, it can be less flexible, especially for tax planning or if the spouses want different beneficiaries.

What to Remember: Before setting up a joint trust, couples should talk about how they want to divide their assets and consider getting advice from a tax professional to avoid problems later.

Bypass Trust

Best for: Controlling pension benefits and ensuring fair distribution in complex family situations.

A bypass trust is used to manage pension lump sum death benefits. Instead of going directly to a spouse or beneficiary, the funds are placed in the trust, which keeps them out of the surviving spouse’s estate and ensures they are distributed according to the grantor’s wishes.

This trust is helpful in situations like:

• Supporting a surviving spouse while ensuring the remaining assets go to the grantor’s children.
• Delaying payments to young or vulnerable beneficiaries until they’re ready.
• Allowing trustees to make one-time payments or loans as needed.

What to Remember: Bypass trusts offer control but may have extra costs, including taxes and administration. Consult an expert to see if it’s the right fit for your situation.

Qualified Terminable Interest Property (QTIP) Trust

Best for: Married couples with large estates who want tax benefits and control over asset distribution.

A QTIP trust allows assets to pass to a surviving spouse without estate taxes, thanks to the unlimited marital deduction. The trust provides financial support to the spouse during their lifetime while ensuring the remaining assets go to the grantor’s chosen beneficiaries, such as children, after the spouse’s death.

This type of trust ensures that the grantor’s wishes are followed, even if the surviving spouse remarries or creates a new estate plan. However, it requires strict compliance with rules, such as ensuring all income is distributed to the surviving spouse annually. Proper documentation and tax filings are essential to maintain the tax benefits.

What to Remember: Setting up a QTIP trust involves strict rules, so working with an attorney is essential to avoid losing the tax advantages.

Special Needs Trust

Best for: Families with dependents who have disabilities and need financial support without losing access to government benefits.

A special needs trust provides financial support for a dependent with a disability, covering expenses like medical care, education, and daily living needs. Unlike direct inheritances or gifts, this type of trust ensures the beneficiary remains eligible for crucial programs like Supplemental Security Income (SSI) and Medicaid.

There are two main types of special needs trusts:

• First-party trusts, which are funded with the beneficiary’s own assets, often require a Medicaid payback provision.
• Third-party trusts, funded by someone else, like parents or grandparents, do not require Medicaid reimbursement and can pass leftover funds to other beneficiaries.

What to Remember: Choosing the right type of special needs trust depends on the funding source and specific legal requirements.

Asset Protection Trust

Best for: High-net-worth individuals looking to shield assets from creditors, lawsuits, or legal claims.

An asset protection trust (or APT) is a specialized irrevocable trust designed to protect assets from legal claims, such as creditor judgments, divorce settlements, or lawsuits. Once assets are placed in the trust, they are no longer considered part of the grantor’s estate, making them inaccessible to creditors under most circumstances.

Asset protection trusts can be set up domestically or in jurisdictions with strong asset protection laws, such as the Cook Islands or specific U.S. states like Nevada and Delaware. Offshore trusts often provide stronger protection but require more complex administration.

What to Remember: It is important to ​​set up this trust before any legal claims arise. Otherwise, it might be considered a fraudulent transfer.

Spendthrift Trust

Best for: Protecting assets from financially irresponsible beneficiaries or their creditors.

A spendthrift trust allows you to limit how and when beneficiaries can access their inheritance. This ensures the assets are not squandered or claimed by creditors. The grantor sets specific rules for distributions—such as providing income at regular intervals or for specific purposes like education or medical expenses—while keeping the principal intact.

The trust typically includes a spendthrift clause, which prevents creditors from accessing the trust assets, adding an extra layer of protection for the beneficiary. However, this level of control requires careful planning and can be complex to manage.

What to Remember: Choosing the right trustee is essential, as they will have significant authority over how and when funds are distributed.

Generation-Skipping Trust

Best for: High-net-worth individuals who want to pass assets to grandchildren or future generations and reduce estate taxes.

A generation-skipping trust allows you to transfer assets directly to your grandchildren or other descendants, bypassing your children’s estates. This strategy helps minimize taxes at each generational transfer, preserving more wealth for future generations. While your children typically won’t inherit the trust’s principal, they can often receive income from it during their lifetime.

However, large transfers may trigger the Generation-Skipping Transfer Tax (GSTT) if they exceed tax exemption limits. This tax ensures that very large estates still contribute to federal taxes, even when skipping a generation.

What to Remember: This type of trust is complex and involves specific tax limits. To take full advantage of exemptions and follow the rules, it’s best to consult a tax professional.

Life Insurance Trust

Best for: Individuals who want to keep life insurance proceeds out of their taxable estate.

A life insurance trust, also called an irrevocable life insurance trust (ILIT), is created to hold the proceeds of a life insurance policy. Because the trust is irrevocable, the grantor must give up ownership of the policy. Once the insured (grantor) dies, the trustee collects the proceeds and distributes them to the beneficiaries as instructed.

One of the main benefits of an ILIT is that the life insurance payouts are excluded from the taxable estate, which helps minimize taxes. These proceeds can also be used to pay estate taxes, debts, or other costs, ensuring that heirs receive more of the remaining estate.

What to Remember: If you already own a life insurance policy and decide to move it into a trust to keep the proceeds out of your taxable estate, you must survive for at least three years after making this transfer. Otherwise, the proceeds will be considered taxable.

Qualified Personal Residence Trust (QPRT)

Best for: Homeowners who want to reduce their taxable estate while retaining temporary residence rights.

A Qualified Personal Residence Trust (QPRT) is an irrevocable trust designed to help you transfer your home to your beneficiaries while lowering the gift tax. It works by letting you move your home out of your estate and into the trust, where you still retain the right to live in it for a set number of years—this is called the retained interest period. Once the period ends, ownership (called the remainder interest) is officially transferred to your beneficiaries.

A QPRT can be a good choice because the IRS allows you to calculate the taxable value of the gift based on the current value of the home minus the value of your retained interest. This reduced gift value often means less tax. Plus, if the value of the home increases over time, the future growth is not taxed as part of your estate.

What to Remember: If you outlive the trust term, the home goes to your beneficiaries, but you’ll have to pay rent to keep living there. If you pass away before the term ends, the home’s full value is added back to your taxable estate, eliminating the tax savings.

Charitable Trust

Best for: Individuals who want to support a charity while reducing estate or gift taxes.

A charitable trust is an irrevocable trust that allows you to donate assets to a non-profit or charitable organization. These trusts are often set up during the grantor’s lifetime and ensure that the charity receives the assets upon the grantor’s death. By transferring assets to a charitable trust, you can reduce estate or gift taxes and support causes you care about.

There are two main types of charitable trusts:

• Charitable Lead Trusts (CLTs): Provide income to a charity for a specific period. Once that period ends, any remaining assets go to the grantor or their chosen beneficiaries.
• Charitable Remainder Trusts (CRTs): Provide income to the grantor or another beneficiary first, with the remaining assets going to the charity after the trust ends.

What to Remember: A charitable trust can be integrated into a standard trust, allowing heirs to receive part of the estate while the charity receives the rest.

Constructive Trust

Best for: Resolving cases of unjust enrichment, fraud, or unfair asset possession.

A constructive trust isn’t a traditional trust with a trustee. Instead, it’s a remedy created by a court to address situations where someone has unfairly obtained or kept assets, such as through fraud, theft, or mistakes. The court orders that the assets be transferred to the rightful owner to correct the injustice.

Common scenarios include stolen property, assets acquired through deceit, or items mistakenly given to the wrong person. Unlike other trusts, a constructive trust isn’t set up in advance but is imposed by the court when no other legal solution is sufficient.

What to Remember: A constructive trust is imposed only when other legal remedies won’t work, so it’s typically a last resort.

Totten Trust

Best for: People who want a straightforward way to pass on financial assets without going through probate.

A Totten trust, also called a payable-on-death (POD) account, lets you name a beneficiary to receive funds in your bank account after your death. The trust avoids probate, ensuring the funds are transferred directly and quickly. While you’re alive, you retain full control over the account, and the beneficiary has no access to it.

Totten trusts are revocable, meaning you can change the beneficiary or close the account at any time. They are simple to set up and manage but don’t offer the same level of flexibility or asset protection as other types of trusts.

What to Remember: Totten trusts are limited to financial assets like bank accounts.

Blind Trust

Best for: Individuals who need to avoid conflicts of interest or maintain impartiality in asset management.

A blind trust allows the grantor to transfer control of assets to an independent trustee who manages them without the beneficiaries’ knowledge or input. The trustee has full discretion over the assets, which helps eliminate potential conflicts of interest, especially in cases involving public officials, business executives, or family disputes.

Blind trusts can be either revocable or irrevocable, depending on the grantor’s preferences. The grantor gives up control of the assets, ensuring impartial management. This type of trust is especially useful when beneficiaries may disagree on how assets should be handled or when transparency could create legal or ethical concerns.

What to Remember: Choosing a competent and trustworthy trustee is important because they will have complete control over the management and distribution of the trust’s assets.

Pet Trust

Best for: Pet owners who want to ensure their animals are cared for after their death or incapacity.

A pet trust is a legal arrangement that guarantees your pet’s care if you’re no longer able to provide it. Unlike a will, which may leave your pet’s care uncertain, a pet trust creates a binding obligation for a trustee to follow your specific instructions. You can outline everything from feeding schedules to medical care, ensuring your pet’s needs are met exactly as you wish.

One advantage of a pet trust is that it takes effect immediately after your death or incapacitation, avoiding delays. Funds can be distributed over time to cover ongoing expenses, and inspections can be required to ensure the caregiver is following your instructions.

What to Remember: Some states limit a trust’s duration and you’ll need to name someone to oversee the trustee’s actions.

Choosing the Right Trust for Your Needs

Trusts can do more than protect assets—they can provide peace of mind, reduce taxes, and secure your loved ones’ future. For more complex needs, like irrevocable or special-purpose trusts, consulting an estate planning attorney can help you navigate the details with confidence.

If your goals are more straightforward, LegalTemplates can help you create a revocable living trust quickly and easily. Join over 500,000 users and take the first step toward securing your legacy today.

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