“Trust” is a word frequently used in financial and legal conversations, but what trusts actually are, and how people use them, is not always clear. Trusts come in many shapes and sizes, but most share a common purpose: helping ensure your assets are managed and distributed according to your wishes. Below, we explore three common types of trusts: revocable trusts, testamentary trusts, and irrevocable trusts.
Revocable Trusts
Revocable trusts, also known as living trusts, are commonly used to simplify how assets are managed and transferred during life and after death. You retain control of your assets during your lifetime while also creating a smoother transition for your family if something happens to you.
One of the biggest advantages is avoiding probate, the court supervised process of administering an estate after someone passes away. Probate can be time consuming, costly, and public. Assets properly titled in a revocable trust generally pass directly to beneficiaries without going through probate, helping streamline estate settlement and preserve privacy.
Revocable trusts can also provide continuity in the event of incapacity. If you become unable to manage your financial affairs, a successor trustee can step in immediately to manage the trust assets on your behalf without court intervention.
Testamentary Trusts
While revocable trusts are commonly used for probate avoidance and incapacity planning, many families also incorporate trusts directly into their wills to help manage how assets are distributed to future generations.
Many parents want their assets to pass to their children but may not want them to receive a large inheritance outright. This is where testamentary trusts become valuable planning tools. Created through your will, these trusts take effect after your death. A trustee you appoint oversees the assets according to the terms outlined in the trust.
In recent years, lifetime trusts have become more common. In the case of testamentary trusts, a trust would be created upon your death and remain in existence through the lifetime of your (most typically) children and/or grandchildren, with the beneficiaries often becoming co-trustees once they reach a certain age. Keeping assets in trust can provide structure and oversight early in life, while also offering potential protection from creditors, lawsuits, and divorce.
Irrevocable Trusts
When you move assets to an irrevocable trust, you generally give up ownership and control of those assets. So why would you intentionally do that?
One of the primary reasons is estate tax planning. By moving assets out of your estate during your lifetime, you may reduce future estate tax exposure for your heirs, including the future growth on any assets gifted into trust during your lifetime. Irrevocable trusts can also offer potential creditor protection, since the assets are no longer legally owned by you.
One of the most common irrevocable structures is the Irrevocable Life Insurance Trust (ILIT). An ILIT is designed to own and manage a life insurance policy on your behalf. Because the trust owns the policy, the insurance proceeds are generally excluded from your taxable estate if structured properly. This can help reduce estate tax exposure while also providing security and liquidity to beneficiaries when they may need it most.
Irrevocable trusts can also be tailored to accomplish a variety of other planning goals These can take many forms with different acronyms you may have heard of: SLATs, GRATs, QPRTs, CRUTs, etc…However, because these structures are often permanent and difficult to modify, they should be implemented carefully and in coordination with financial advisors and estate attorneys.
Is a Trust Right for You?
As your financial life grows more complex, trust planning can be powerful in protecting assets, managing potential tax liabilities, and helping ensure your wealth reaches the people and causes you care about most. The right structure depends on your unique goals, family dynamics, and long-term planning objectives.