Types of Trusts

The right type of trust depends on your goals

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In estate planning, many believe a will is the only document they need to fulfill their wishes after their death. But enacting the distributions called for by your will can be a lengthy and complicated process due to probate. This is where a trust comes in: Property distributed through a trust avoids the probate process. A trust also gives you more control over how your property is distributed.

There are two basic types of trusts: revocable and irrevocable trusts. However, there are many special types of trusts within these categories. Learn about some of the most common types of trusts, how they work, and how to pick a trust that suits your needs.

Key Takeaways

  • A trust is either revocable or irrevocable, depending on whether its creator retains control of trust assets.
  • Only an irrevocable trust will reduce estate taxes and protect property against creditor claims.
  • Some special types of trusts that serve specific purposes include bypass trusts, charitable remainder trusts, pet trusts, and special needs trusts.

Revocable Trust

A revocable trust is a legal document you create to manage assets while you’re alive and distribute the remaining property to your beneficiaries when you die. “Revocable” means you can amend the trust or terminate it altogether whenever you want, as long as you’re competent to do so.

The person who creates the trust is known as the grantor. Many grantors of revocable trusts also serve as the trustee, which means they manage and invest the assets.

If you choose to serve as the trustee, you’ll typically appoint a person or financial institution to be the co-trustee or successor trustee. The co-trustee will manage trust assets if you become incapacitated. They’ll also distribute property in the trust to your beneficiaries according to your instructions when you die.

To set up a revocable trust, you need to prepare an estate-planning document called a declaration of trust. Many websites that let you create a will online also offer revocable trust documents. However, it’s advised to work with an estate-planning attorney, particularly if you have a large estate or a complicated situation. Once you’ve established the trust, you’ll need to fund it by transferring property and retitling the property from your name to the trust’s name.

A revocable trust has several advantages and disadvantages over an irrevocable trust. Here are the most important differences you need to know about.

Can Be Modified

The defining feature of a revocable trust is that it can be modified anytime in the grantor’s life. You can amend the terms, change your beneficiaries, or dissolve the trust if you want. Because you can withdraw trust assets or change the stipulations at any time, property in a revocable trust remains part of your estate.

Allows You To Retain Control of Property

One big advantage of revocable trusts is that they allow the grantor to manage trust property while they’re still alive, as long as they’re not incapacitated. Most trust agreements allow the grantor to withdraw whatever assets they want at any time.

Revocable trusts can be a good planning tool when the grantor is in poor health. Many revocable trusts are set up so that the successor trustee can manage assets if the grantor becomes incapacitated. This is an advantage because a court wouldn’t need to appoint a guardian to control property in the trust.

Avoids Probate, but Not Estate Taxes

A revocable trust helps your estate bypass probate, which can be long and costly in some situations. However, because the assets are considered part of your estate, a revocable trust generally won’t help you avoid estate taxes.


You’re only subject to estate taxes if the value of your estate exceeds the estate tax exemption. In 2022, the first $12.06 million of your estate is exempt if you’re single. For married couples taking advantage of the unlimited marital deduction, the combined exemption is $24.12 million.

No Creditor Protection

In most situations, assets placed in a revocable trust aren’t shielded from your creditors, since you’re still considered the owner. When you die, creditors can file a claim against the trust, just as they can file a claim against your estate for unpaid debt. However, you may be able to add what’s known as a spendthrift provision that prevents your beneficiaries’ creditors from attaching a claim to the trust.

Irrevocable Trusts

An irrevocable trust also is a legal entity used to distribute property. However, unlike a revocable trust, the grantor doesn’t retain control of their assets. An irrevocable trust is typically set up for a specific purpose, such as minimizing taxes, sheltering assets from creditors, or protecting a beneficiary’s eligibility for certain government benefits.

Because an irrevocable trust is a complex planning tool, it’s essential to work with an attorney. Here are some key ways irrevocable trusts are different from revocable trusts.

Can’t Be Modified by the Grantor

The term “irrevocable” means the grantor can’t make changes to the trust once it’s established. However, there are some circumstances when the trust can be modified. Some trust documents designate a third-party person called a trust protector who is allowed to make certain changes. Some state statutes allow for modifications if both the trustee and the beneficiary agree to them.

Eliminates Grantor’s Ownership Rights

Once assets are placed in an irrevocable trust, the grantor no longer has access or ownership rights. Because the grantor relinquishes rights to the property, it isn’t treated as part of their estate.

Offers Unique Protections

An irrevocable trust offers several protections you don’t get with a revocable trust. However, irrevocable trusts require especially careful planning.

Because assets transferred to an irrevocable trust aren’t part of your estate, they’re often used to minimize estate taxes. In this circumstance, the grantor will need to pay income taxes for the trust without reimbursement from the trust; otherwise, the tax benefits of the trust could be voided. Another benefit is that irrevocable assets are off-limits to creditors. They may be useful to protect assets in a lawsuit. Some irrevocable trusts are set up to protect a beneficiary’s eligibility for certain government benefits.

Special Types of Trusts

You may need to set up a specialized trust, depending on your needs and goals. Here are some common special types of trusts.

Bypass Trust

Also known as an AB trust, this strategy for married couples maximizes the federal estate tax exemption. Essentially, two separate trusts are established upon the death of the first spouse.

The “B” trust, which is irrevocable, typically holds assets up to the exclusion amount ($12.06 million in 2022). It provides income to the surviving spouse; however, they don’t control the assets. When the surviving spouse dies, B-trust assets pass to the couple’s other beneficiaries.

The “A” trust, which is revocable, holds the surviving spouse’s property, or leftover property above the $12.06 million exclusion amount. The surviving spouse retains ownership and control of assets in the A trust.

Charitable Remainder Trust

A charitable remainder trust is an irrevocable trust that benefits a charity while providing a stream of income during the donor’s lifetime or the life of the trust. When the donor dies or the trust term ends, the charity gets the remaining assets.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust is a trust used to shield a life insurance payout from estate taxes. However, if you die within three years of transferring the policy to the trust, the policy will still be included in your estate.

Marital Deduction Trust

A marital trust is a tool frequently used by high-net-worth couples to shield assets from estate taxes. When one spouse dies, assets go into the marital trust, avoiding federal estate taxes. When the second spouse dies, assets in the trust aren’t considered part of the estate, therefore, they aren’t subject to estate taxes.

Pet Trust

A pet trust is used to provide for the care of an animal if the grantor dies or becomes disabled. Depending on state law, the trustee will make regular payments to the animal’s caretaker for up to 21 years or until the animal’s death, whichever comes first.

Special Needs Trust

A special needs trust (SNT) protects a beneficiary’s eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI). Because the beneficiary doesn’t own the assets, they can still qualify for needs-based assistance programs that typically have asset limits.

Testamentary Trust

A testamentary trust is established in the grantor’s will and comes into existence only when the grantor dies. This tool is commonly used to provide for young children if both parents die or to leave assets to an individual with a disability.

How To Choose the Type of Trust for Your Estate

Although they can be useful, not everyone needs a trust. For example, if you have a relatively small estate and avoiding probate is the goal, setting up a trust may not be worth the cost. Many states have simplified probate processes for estates with relatively low values.

For most people who opt for a trust, a revocable trust will be the best choice. You’ll retain control of your assets and can modify the terms. An irrevocable trust only makes sense in specific situations: when you have a high-value estate that could be subject to estate taxes, you’re protecting your assets from creditors, or you have a beneficiary with special needs.

Frequently Asked Questions (FAQs)

What is the purpose of a trust fund?

A trust fund provides for beneficiaries while maintaining control of how assets are distributed. Some parents may opt to set up a trust fund for a child, rather than leaving them money through a will, because they’re concerned the child would mismanage a large, lump-sum inheritance. Trust funds can also be used to avoid probate and minimize taxes.

How much does it cost to set up a trust fund?

The cost of setting up a trust fund depends on the type of trust you’re setting up. If you’re establishing a relatively straightforward revocable trust through an estate planning attorney, typical costs range from $1,500 to $2.500.

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  2. IRS. “Estate Tax.”

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  7. Legal Information Institute. “Bypass Trust.”

  8. Schwab Charitable. "Convert Appreciated Assets Into Income With a Charitable Remainder Trust (CRT)."

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  11. Special Needs Alliance. "A Short Primer on Trusts and Trust Taxation.”

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