Types of Trusts

If you’ve already learned the basics of what a trust is and how it can help protect your assets, you may be wondering: What kind of trust would benefit me?

The answer depends on your goals. While all trusts are designed to hold and manage assets for the benefit of another person or organization, they aren’t all created for the same purpose. Some prioritize flexibility, while others focus on protecting assets, reducing taxes, providing for loved ones, or supporting charitable causes.

In fact, many trusts share similar features. Most allow you to name a trustee to manage assets according to your wishes, designate beneficiaries, and provide detailed instructions for when and how assets should be distributed. The differences lie in when the trust takes effect, whether it can be changed, how much control you retain, and the specific financial or estate planning goals it helps to accomplish.

Let’s take a closer look at some of the most common types of trusts and who they’re best suited for.

Revocable Living Trust

A revocable living trust is one of the most commonly used estate planning tools. It is created during your lifetime and, as the name suggests, can be modified, updated, or revoked whenever your circumstances change.

Most people who establish a revocable living trust also serve as the trustee, meaning they continue to manage their assets just as they always have. You can add or remove property, change beneficiaries, or revise instructions as your life evolves.

A revocable living trust is best for:

• Individuals and families wanting flexibility
• Homeowners
• People looking to avoid probate
• Those planning for possible incapacity

Like nearly any trust, a revocable trust allows you to appoint beneficiaries, choose a successor trustee, and outline exactly how assets should be managed and distributed. It helps ensure your wishes are carried out according to written instructions.

Unlike irrevocable trusts, which we will learn about next, a revocable trust allows you to maintain full control of your assets during your lifetime. Because you still own and control those assets, they generally remain part of your taxable estate and are not protected from creditors.

One of the greatest advantages of avoiding probate. Upon your death, the successor trustee you’ve selected can distribute assets according to your instructions without the delays and expenses often associated with probate court.

Another valuable feature is incapacity planning. If illness or injury prevents you from managing your finances, your successor trustee can step in and continue managing the trust without requiring court-appointed guardianship.

Irrevocable Trust

An irrevocable trust is also established during your lifetime, but unlike a revocable trust, it generally cannot be changed or revoked once it has been created and funded. When assets are transferred into the trust, ownership is typically transferred from you to the trust itself.

An irrevocable trust is best for:

• Individuals with larger estates
• Families interested in long-term wealth preservation
• Business owners
• Those seeking asset protection or estate planning

Like a revocable trust, an irrevocable trust can avoid probate, name trustees and beneficiaries, and provides detailed instructions for managing assets. Both can also help ensure assets are distributed according to your wishes rather than state law.

The key distinction between revocable and irrevocable trusts is control. Because you generally give up ownership of the assets with an irrevocable trust, they may receive protection from creditors and lawsuits, prioritizing protection. Additionally, they may no longer be included in your taxable estate, depending on the circumstances.

Although giving up control is a significant decision, many people find the added protection worthwhile when planning for future generations or preserving substantial assets.

Testamentary Trust

Unlike the previous two trusts, a testamentary trust isn’t created during your lifetime. Instead, it’s established through your will and only becomes effective after your death.

A testamentary trust is best for:

• Parents of minor children
• Families with young beneficiaries
• Individuals who want continued control over inheritances

Like most trusts, a testamentary trust appoints a trustee, names beneficiaries, and provides written instructions for managing and distributing assets.

The biggest difference is timing. Because this trust is created through your will, it generally goes through probate before it becomes active.

Many parents use testamentary trusts to prevent young children from receiving a large inheritance all at once. Instead, the trustee can distribute money over time or for specific purposes such as education, healthcare, or purchasing a first home.

It is important to note that setting similar rules like distributing inherited funds over time for specific purposes can also be done with a revocable trust, again, making the main difference here timing.

Special Needs Trust

A special needs trust is specifically designed to provide financial support for an individual with a disability while helping preserve eligibility for certain government assistance programs.

A special needs trust is best for:

• Families caring for someone with disabilities
• Parents and grandparents planning long-term care
• Individuals wishing to leave an inheritance without affecting public benefits

Like other trusts, a trustee manages assets on behalf of a beneficiary according to detailed instructions established by the creator of the trust.

Its purpose is highly specialized. Rather than simply transferring wealth, a special needs trust helps provide supplemental financial support without necessarily interfering with eligibility for programs such as Medicaid or Supplemental Security Income (SSI).

Funds can often be used for therapies, education, transportation, adaptive equipment, recreation, and other expenses that improve quality of life.

BANKING CONSIDERATIONS FOR INDIVIDUALS WITH CAREGIVERS

Charitable Trust

A charitable trust allows you to support nonprofit organizations while also potentially receiving tax advantages, generating income, and managing the transfer of wealth to heirs.

A charitable trust is best for:

• Individuals with significant appreciated assets (stocks, real estate, or a business) who want to reduce capital gains taxes.
• People who have charitable causes or organizations they want to support long term.
• High-net-worth families looking to reduce estate taxes and preserve wealth for heirs

Like other trusts, charitable trusts hold and manage assets under the direction of a trustee according to the creator’s written instructions. Rather than benefiting only family members or individual beneficiaries, charitable trusts are designed to benefit one or more charitable organizations, either immediately or after providing income to you or your beneficiaries for a period of time.

Many charitable trusts also provide potential tax advantages while allowing donors to make a meaningful community impact.

Spendthrift Trust

A spendthrift trust helps protect an inheritance when a beneficiary may not be prepared to manage significant financial assets responsibly.

A spendthrift trust is best for:

• Beneficiaries with limited financial experience
• Families concerned with overspending
• Parents and grandparents wanting long-term financial security for heirs

Like many trusts, a trustee manages the assets and distributes funds according to the instructions you’ve established.

Instead of allowing unrestricted access to inherited assets, the trustee controls distributions based on your instructions. This structure helps protect beneficiaries from poor financial decisions and, in some cases, may also shield assets from certain creditors.

Asset Protection Trust

An asset protection trust is designed to help protect assets from future legal claims or creditors. These trusts are subject to complex legal requirements and vary by state.

An asset protection trust is best for:

• Business owners
• Physicians and other professionals with increased liability exposure
• Individuals seeking additional asset protection

Like irrevocable trusts, asset protection trusts generally require relinquishing a degree of ownership or control over the assets placed into the trust,

Their primary objective isn’t avoiding probate or managing inheritances; it’s helping preserve assets from future legal risks while complying with applicable state and federal laws.

Because these trusts involve specialized legal planning, they’re typically established with guidance from an experienced estate planning attorney.

Comparing the Different Types of Trusts

While each trust serves a unique purpose, several common themes emerge:

• Nearly every trust names a trustee to manage assets on behalf of beneficiaries.
• Most trusts include detailed instructions about when and how assets should be distributed.
• Many trusts avoid probate, although testamentary trusts generally do not because they are created through a will.
• Some trusts provide flexibility, while others emphasize asset protection or tax planning.
• Several trusts can work together as part of a comprehensive estate plan. For example, someone may have a revocable living trust for everyday estate planning, while also establishing a special needs trust or charitable trust to accomplish more specific goals.

Trusts are Powerful Planning Tools

Despite common misconceptions, trusts aren’t reserved for the ultra-wealthy. They can help families simplify estate administration, protect loved ones, preserve wealth, support charitable causes, and provide greater peace of mind.

END OF LIFE FINANCIAL PREPARATION: SOMETHING YOU MAY WANT TO CONSIDER

Because every family has different priorities, there is no single “best” trust. The real value comes from choosing the trust (or combination of trusts) that aligns with your goals.

Your community bank can also play an important role in your estate planning journey by helping to manage trust-related accounts, safeguard assets, and coordinate your financial plan alongside your attorney and trusted financial advisors. Working together, you can build a plan that protects your legacy for generations to come.

For guidance or questions regarding setting up a trust, make sure to work with professionals that will assist you in finding which trust (or trusts) would be best for you.