A Guide to the Different Types of Trusts & How to Find the Right Fit for Your Estate Plan

A Trust is one of the most powerful tools in an estate planner’s toolbox, offering many benefits, from asset protection and tax minimization to probate avoidance and structured distribution of wealth.

But with so many different types of trusts to choose from, each with its own unique features and advantages, it can be challenging to determine which one is the best fit for your specific needs and goals.

In this comprehensive guide, we’ll walk you through the key types of trusts, explaining how they work, outlining their primary benefits, and helping you understand which situations they are best suited for.

Revocable Living Trusts

A revocable living trust, sometimes referred to as an inter vivos trust, is a versatile trust that can be changed or canceled by the grantor (the person who creates and funds the trust) at any time during their lifetime. This flexibility is one of the primary advantages of a revocable trust.

Key Benefits

• Allows the grantor to maintain complete control over the trust assets while alive and of sound mind
• Avoids the time, expense, and public nature of probate upon the grantor’s passing, enabling a smooth, private transfer of assets to beneficiaries
• Provides a clear plan for management of assets in the event of the grantor’s incapacity by allowing a hand-picked successor trustee to step in

When to Use a Revocable Living Trust

Consider a revocable living trust if you want to maintain maximum flexibility and control over your assets during your lifetime while still facilitating an efficient, probate-free transfer of those assets to your chosen beneficiaries after death. It can be a good foundational trust for many people embarking on the estate planning process.

Irrevocable Trusts

In contrast to revocable trusts, an irrevocable trust is extremely difficult to modify or terminate once established, even if circumstances or wishes change. When you place assets in an irrevocable trust, you relinquish ownership and control of those assets, which are then managed by a trustee on behalf of your designated beneficiaries.

Key Benefits

• Removes assets from your taxable estate, potentially providing significant estate tax savings
• Safeguards assets from creditors, lawsuits, and divorcing spouses
• Can help you qualify for means-tested government benefits like Medicaid by reducing your countable assets

When to Use an Irrevocable Trust

An irrevocable trust can be a savvy choice if your priority is asset protection and/or minimizing tax liability and you’re comfortable surrendering a degree of control to achieve those objectives. Given their permanence, irrevocable trusts demand very careful forethought.

Testamentary Trusts

A testamentary trust is a trust that is created upon your death through instructions contained in your last will and testament. The trust doesn’t actually exist until after you pass away when your will goes into effect.

Key Benefits

• Enables you to specify when and how beneficiaries will receive assets rather than an outright distribution
• Protects assets for beneficiaries who are minors, have special needs, or may not manage money responsibly
• Ensures an inheritance remains in the family and isn’t lost to a beneficiary’s potential divorce or creditors

When to Use a Testamentary Trust

A testamentary trust can be an excellent tool if you want to provide for loved ones after your passing but are concerned about their ability to productively handle an inheritance. It’s commonly used by parents of minor children or those with spendthrift adult children.

Special Needs Trusts

A special needs trust is a specialized trust designed to provide financial resources for the care of a beneficiary with a disability in a way that doesn’t jeopardize their eligibility for public benefits like Supplemental Security Income (SSI) or Medicaid.

Key Benefits

• Enables a beneficiary to tap trust assets for supplemental needs while still qualifying for vital public benefits
• Enhances quality of life by paying for extras like education, recreation, and vacations
• Offers peace of mind that a vulnerable loved one will have resources to meet their unique needs

When to Use a Special Needs Trust

A special needs trust is a must if you want to provide for a disabled child or adult without the risk of disqualifying them from essential government aid. The trust can enrich their life while preserving access to core support programs.

Charitable Trusts

For the philanthropically inclined, charitable trusts offer a way to support beloved causes while reaping some impressive tax benefits. The two primary types are charitable lead trusts (CLTs), which pay an income stream to charity for a set term before passing remainder assets to family beneficiaries, and charitable remainder trusts (CRTs), which work the opposite way.

Key Benefits

• Enables meaningful support of cherished charities
• Provides substantial income, gift, and estate tax charitable deductions
• Offers a way to convert appreciated assets into a lifetime income stream (CRTs)

When to Use a Charitable Trust

A charitable trust, particularly a CRT, can be a smart move for those with highly appreciated assets they want to sell without incurring an immediate capital gains hit and who also want to combine tax-savvy retirement income planning with impactful philanthropy.

Finding Your Ideal Trust

With so many different types of trusts to weigh, selecting the right one comes down to pinpointing your unique needs and aims. Important factors to consider include your wealth transfer goals, tax concerns, asset protection priorities, charitable wishes, and the level of control you want to retain.

An experienced estate planning attorney can be an indispensable guide in navigating this decision-making process. They’ll dive deep to understand your circumstances, family dynamics, and aspirations for the future. Then, they’ll thoughtfully explain your options and help you establish the optimum trust plan.

At Vollrath Law, our practice is dedicated to crafting meticulously customized estate plans that provide both peace of mind and enduring security for our clients and their loved ones. Trusts are one of the most potent instruments we deploy to achieve those worthy aims.

If you’re ready to explore whether a trust is right for you and your family, we’re here to help. Contact us today to schedule a personal consultation. Together, we can ensure that the legacy you envision becomes the reality you create.