What Is a Trust and How Can One Help You?

In the world of estate planning, trusts are like Swiss Army knives—powerful and versatile financial planning tools that most wealthy people should become familiar with. Learning about the diverse benefits that trusts offer is a great place to begin this process.

Trusts may help you minimize estate taxes and maximize donations in tax-advantaged ways. They may also be used to achieve other goals, like funding care for a loved one with a disability or chronic illness, or providing for children from a previous marriage. The adaptability of trusts is a key feature, but understanding how they work is essential.

What is a trust?

Simply put, a trust is a legal arrangement that ensures your assets will be managed according to your wishes during and after your lifetime. To learn more about trusts, however, you'll first need to know about three key stakeholders—the grantor, the beneficiary and the trustee.

• Grantor: The grantor establishes a trust, sets its terms and funds it. A grantor may also be referred to as the settlor, trustor or trustmaker.
• Beneficiary: A beneficiary is anyone entitled to receive the trust's assets. A trust's beneficiaries are determined by the grantor.
• Trustee: The trustee is an individual or institution responsible for managing the trust's assets and carrying out the terms outlined in the trust document.

Four main categories of trusts

It's helpful to understand the fundamental differences between four available trust categories—living trusts versus testamentary trusts and revocable trusts versus irrevocable trusts.

• Living trust: A living trust is funded while you're alive, but control of the trust doesn't transfer until after your death.
• Testamentary trust: A testamentary trust is funded after your death based on the terms of your will.
• Revocable trust: As the name implies, the terms of a revocable trust may be revoked while the grantor is alive.
• Irrevocable trust: The terms of an irrevocable trust can't be changed by the grantor—although in some states, beneficiaries may petition a court for modifications.

Benefits of trusts

There are many types of trusts, each offering a distinct set of benefits. However, many people choose to establish a trust for the following reasons.

Reducing the risk of probate

If set up correctly, a trust may help ensure your estate won't go through probate, which can be a lengthy and complicated process of validating and administering the estate. By avoiding it, a trust may ease the burden on your heirs to manage your estate after your death.

Increasing privacy

When an estate goes into probate, the details become public record. By comparison, a trust document is typically private, meaning your personal information isn't likely to become part of the public record. This distinction may be important to people who place a premium on privacy.

Shielding assets

Irrevocable trusts may shield assets from creditors and help you minimize estate taxes. However, these particular benefits are subject to the terms of the trust agreement and applicable federal and state law. Revocable trusts don't offer this potential protection.

Achieving specific goals

While trusts generally help people transfer and protect assets, there are other reasons why you may choose to establish a trust, such as to donate to charity or control how heirs spend your money. It's helpful to speak with a financial professional or estate attorney about your reasons for establishing a trust so they can help you determine which type may best meet your needs.

Trusts for minimizing estate taxes

Generally, the only people who use irrevocable trusts to help minimize estate tax are those with a taxable estate large enough to breach the federal estate tax exemption—currently just over $13 million for individuals and $27 million for couples. However, these exemption thresholds are set to expire as of December 2025, and that could expose more people to estate tax liability.

If you're concerned that your estate may be liable for estate taxation—or could be in the future—it's worth talking with a tax specialist or estate attorney about the following irrevocable trust options.

Irrevocable life insurance trusts

Irrevocable life insurance trusts, or ILITs, are popular among individuals with sizable life insurance policies. Because the ILIT owns and controls the policy or policies, the value of the death benefits is removed from your estate.

Grantor retained annuity trusts

Grantor retained annuity trusts, or GRATs, can be a great tool for individuals and families who expect to see the value of their assets appreciate significantly over time. Using a GRAT may also be worthwhile for undervalued assets.

Qualified personal residence trusts

Qualified personal residence trusts, or QPRTs, may shield a private residence or vacation home from estate taxes. During the term of a QPRT, the grantor may live in the home rent-free. Once the term ends, the grantor would then be required to pay rent.

Spousal lifetime access trusts

Spousal lifetime access trusts, or SLATs, are typically used for lifetime giving between married couples. The grantor spouse transfers assets into the trust, removing those assets from their estate for tax purposes, but the beneficiary spouse and other beneficiaries may receive income and principal during their lifetime. If structured properly, remaining trust assets will pass to designated heirs free of estate taxes.

Trusts for charitable giving

Setting up an irrevocable charitable trust may help you support causes you care about in a tax-smart way. The two types of charitable trusts available support charities and your beneficiaries, but they operate in inverse order to one another.

Charitable lead trusts

By depositing assets into a charitable lead trust, or CLT, you equip the trust to make periodic distributions known as lead payments to your chosen charity. After the lead payments are completed, the remaining assets in the trust are distributed to your selected beneficiaries, effectively reducing both gift and estate taxes.

Charitable remainder trusts

A charitable remainder trust, or CRT, works in the opposite manner. The trust pays its lead payments to you or your beneficiaries. At the end of the term or upon the death of the last beneficiary, the remaining assets will be donated to your chosen charity. CRTs are a way to obtain income from the disposition of appreciated assets while potentially avoiding capital gains tax liability.

Whether you choose a CLT or a CRT depends on your financial goals and preferences. Talking with a wealth consultant about tax and estate planning may provide valuable guidance.

Trusts for blended families

A blended family may complicate estate planning. For example, someone with adult children from a previous marriage may need to engage in extra planning to ensure their estate provides for those children.

There are two types of trusts for blended families that can help plan for such outcomes—qualified terminable interest property trusts, or QTIPs, and AB trusts.

QTIPS

QTIPs provide shelter from estate taxes while providing income to your surviving spouse. A surviving spouse is the trust's beneficiary during their lifetime, making them eligible to receive income and benefits generated by the trust. The trust terminates when your surviving spouse dies, and your designated beneficiaries—for example, children from a previous marriage—will receive the assets at that time.

AB trusts

Under an AB trust, also known as a bypass trust, one or both spouses establish two separate trusts that are triggered by the death of the first spouse. Trust A is a revocable trust that holds the surviving spouse's assets, while an irrevocable trust, trust B, contains the deceased spouse's assets. Generally, the surviving spouse—or a corporate trustee—is the trustee for both trusts during their lifetime, with access to income and benefits from both. However, the surviving spouse may not change the beneficiaries of trust B, and those assets will transfer upon the surviving spouse's death.

Trusts to control distribution

In some situations, your goal may be to exercise guidance over how your heirs spend an inheritance. For example, you may be worried that an heir will make poor spending choices. Alternatively, you may want to ensure your money is spent on educational expenses or provide for a loved one whose disability or chronic illness prevents them from being able to manage their finances. Several trusts are ideally suited for use in these situations.

Spendthrift trusts

A spendthrift provision within this kind of trust allows you to limit the beneficiary's access to the trust income according to terms you define. Depending on your goals, you may also choose to set guidelines on how the money is spent. Spendthrift provisions may also help protect assets from legal claims made by creditors.

Educational trusts

Like the name implies, an educational trust requires a beneficiary to spend the trust proceeds only on educational expenses. These kinds of provisions may be part of living or testamentary trusts.

Special needs trusts

A special needs trust may be used to provide ongoing financial support for an individual with a physical or mental disability or a chronic illness. Notably, the assets of a special needs trust won't count against these beneficiaries for needs-based government assistance.

How to create a trust

The first step when establishing a trust is enlisting the help of an experienced estate attorney. They'll work with you to create a trust document, which will govern how your assets are to be distributed or used. This document should accurately reflect your reasons for creating the trust and must conform to federal and state laws.

You can choose to fund a trust with various asset types, such as property, cash and investments. In addition, you may name a trust as the beneficiary of a life insurance policy. In this case, the proceeds from that policy will transfer to the trust when you pass away.

Once a trust is funded, it's up to the trustee to follow the instructions outlined in the trust document. It's important to note that trustees have a fiduciary duty to follow those terms and to act in the best interests of the trust's beneficiaries. Choosing an experienced trustee who understands how to follow through on this responsibility is essential—especially for more complicated trusts.

The bottom line

Before you engage an experienced estate attorney to create your trust, you need a clear understanding of how a trust may help you achieve your goals. Speaking with a wealth consultant who has detailed insight into your financial situation may help you identify the type of trust that can work best and what assets are available to fund it.

Enlisting the support of a financial professional who has access to a team of specialists—including fiduciary officers, estate settlement professionals and insurance specialists—could go a long way toward making your estate planning goals a reality.