Different Types of Trusts Explained

The word trust is often used to describe someone who is the beneficiary of a trust fund. Despite the common misconception that only wealthy people have trusts, they are a valuable estate planning tool for individuals and families of all sizes. A trust helps manage and protect assets, control distributions to heirs, and preserve your family’s legacy.

Whether you are planning for your family, protecting assets, or looking to avoid probate, understanding the different types of trusts can help you make informed estate planning decisions.

What Is a Trust?

A trust is a legal arrangement between three parties:

• Trustor (Grantor or Trust Maker): The person or people who create the trust and transfer assets into it.
• Trustee: The individual or entity responsible for managing the trust according to its terms.
• Beneficiary: The person, people, or organisations who receive the benefit of the trust assets.

Trusts can be created by one person, multiple people, or even certain entities. Depending on the trust, assets may be managed during the trustor’s lifetime or after their death.

Benefits of a Trust

Trusts provide many important estate planning benefits, including:

• Avoiding or minimising probate.
• Keeping asset transfers private.
• Providing faster distribution of assets to beneficiaries.
• Protecting assets from creditors and legal claims.
• Helping reduce certain estate and gift taxes.
• Supporting Medicaid planning in appropriate circumstances.
• Providing long-term financial management for minors or beneficiaries with disabilities.

Avoiding Probate

One of the primary advantages of a trust is that assets held in the trust generally do not need to pass through probate before reaching beneficiaries. This often allows beneficiaries to receive assets more quickly and privately.

Unlike probate proceedings, which become part of the public record, trusts generally remain private.

Protecting Loved Ones

A trust can also benefit the person creating it during their lifetime. Additionally, trusts may be used to hold and distribute assets for beneficiaries who are minors, have disabilities, or are otherwise unable to manage finances independently.

Medicaid Planning

Certain trusts are used as part of Medicaid planning by removing countable assets from an individual’s estate. Because Medicaid eligibility rules are complex, these trusts are generally established well in advance of applying for benefits, often at least five years beforehand.

Asset Protection and Tax Planning

Trusts may also help reduce estate or gift taxes while protecting assets from creditors, legal claims, and family disputes regarding inheritance.

Every family’s circumstances are different, and there may be additional reasons why creating a trust is beneficial.

Common Types of Trusts

The most common types of trusts include:

Trust Type	When It Is Created	Primary Purpose
Living Trust	During the trustor’s lifetime	Manage assets while alive and simplify distribution after death.
Testamentary Trust	Created through a will after death	Provide ongoing management of inherited assets.
Revocable Trust	During the trustor’s lifetime	Allows changes or revocation while the trustor is living.
Irrevocable Trust	During the trustor’s lifetime	Provides stronger asset protection and potential tax or Medicaid planning benefits.

Living Trust

A living trust is established while the trustor is alive. Assets held in the trust remain available to the trustor throughout their lifetime. This option is useful for individuals who want continued access to their assets while providing clear instructions for distribution after death.

Testamentary Trust

A testamentary trust is commonly created through a will after the trustor’s death. It is often used to benefit descendants and becomes irrevocable once established.

Revocable Trust

A revocable trust is created while the trustor is alive and allows them to retain control of the trust assets. Frequently, the trustor also serves as the trustee and beneficiary during their lifetime.

Following the trustor’s death, a successor trustee assumes responsibility for managing the trust according to its terms. The trustor may amend or revoke this type of trust while living.

Irrevocable Trust

An irrevocable trust generally cannot be changed or terminated once created. Because the trustor no longer owns the assets placed into the trust, these trusts often provide stronger protection from creditors and may assist with tax planning or Medicaid planning.

Irrevocable trusts may also help manage inheritances for minors or individuals with special needs by distributing assets over time according to the trust’s instructions.

Choosing the Right Trust

Selecting the appropriate trust depends on your personal goals, financial circumstances, family situation, and long-term estate planning objectives.

An experienced estate planning attorney can help you determine which trust—or combination of trusts—best meets your needs while protecting your assets and your loved ones.

For additional information about trusts and estate planning, you can also visit the American Bar Association – Real Property, Trust and Estate Law.

This article offers a summary of aspects of estate planning law. It is not legal advice and does not create an attorney-client relationship. For legal advice specific to your situation, you should consult an experienced trust planning attorney.

If you would like to discuss ways we can help, please contact our office at (352) 565-7737.