Trust Types Compared: Which Trust Fits Your Goals?

Quick overview

A trust is a legal relationship where a grantor (also called a trustor or settlor) transfers assets to a trustee to hold and manage for one or more beneficiaries. Trust Types determine control, flexibility, tax treatment, and whether assets bypass probate. Picking the right trust depends on your goals: avoiding probate, reducing estate tax exposure, protecting assets from creditors, preserving government benefits for a disabled beneficiary, or supporting long-term family governance.

In my practice I often start planning conversations by asking two questions: What do you want to protect, and when must it be accessible? Those answers typically point to one or more specific Trust Types.

How the main Trust Types differ (and when to consider each)

Below are the most commonly used trust categories, practical uses, and key trade-offs.

• Revocable Living Trust

• Purpose: Keep control during life, simplify asset transfer at death, often avoid a probate proceeding for assets titled in the trust.

• Pros: High flexibility — grantor can change or revoke; privacy for heirs; usually avoids probate for assets properly funded into the trust.

• Cons: Assets remain in the grantor’s estate for estate-tax purposes in many cases; limited creditor protection while grantor is alive.

• When to consider: You want to streamline transfers, manage assets if you become incapacitated, or maintain privacy. See our deeper guide on a Revocable Living Trust for steps and checklist.

• Internal link: Revocable Living Trust

• Irrevocable Trusts (broad category)

• Purpose: Remove assets from the grantor’s taxable estate and, in many cases, shield them from creditors.

• Pros: Stronger asset protection; potential estate- and gift-tax advantages depending on funding and type.

• Cons: Limited or no ability to change terms once funded; complex setup and administration.

• When to consider: You want permanent removal of assets from your estate for tax, Medicaid planning, or creditor-protection reasons. For a specific example, see Irrevocable Life Insurance Trusts below and our dedicated ILIT guide.

• Internal link: Irrevocable Life Insurance Trust (ILIT)

• Testamentary Trust

• Purpose: Created by instructions in a will and takes effect only after the grantor’s death.

• Pros: Can control distributions for minors or vulnerable beneficiaries; useful for court-supervised structures tied to the will.

• Cons: Because it’s part of the will, it generally goes through probate; it doesn’t avoid probate and is public record when the will is probated.

• When to consider: You want to create a trust for beneficiaries but prefer to fund it at death via your will (for example, for minor children or conditional bequests).

• Special-Needs (Supplemental Needs) Trust

• Purpose: Provide for a beneficiary with disabilities without disqualifying them from means-tested government benefits such as Supplemental Security Income (SSI) or Medicaid.

• Pros: Preserves government benefits while providing supplemental care; can be designed as first- or third-party versions with different rules.

• Cons: Complex rules; distributions must be carefully managed to avoid benefit disruption.

• When to consider: You want to provide long-term support for a disabled family member while preserving benefits.

• Irrevocable Life Insurance Trust (ILIT)

• Purpose: Own life insurance policies outside the grantor’s estate so proceeds may not be included in estate tax calculations.

• Pros: Keeps life insurance proceeds out of the taxable estate (when properly structured); provides liquidity to pay estate taxes or support heirs.

• Cons: Must be irrevocable and properly funded; gifting premiums to the trust has gift-tax and reporting implications.

• When to consider: You want to use life insurance to pay estate taxes or provide liquidity for heirs without increasing taxable estate assets. See our ILIT guide for set-up details and common mistakes.

• Internal link: Irrevocable Life Insurance Trust (ILIT)

• Charitable Trusts (Charitable Remainder Trust, Charitable Lead Trust)

• Purpose: Combine philanthropic goals with income-tax or estate-tax benefits.

• Pros: Potential income- or estate-tax advantages and a way to support charities while providing income to grantor or other beneficiaries.

• Cons: More complex administration; payout and valuation rules create reporting obligations.

Funding and why it matters

A trust only controls assets actually transferred into it. Many problems I see in practice come from an otherwise valid trust that was never funded: real estate still titled in the grantor’s name, retirement accounts left unchanged, or bank accounts not retitled. Funding is the operational step that makes the trust effective.

• Real property must be retitled into the trust (or a properly drafted pour-over will used).
• Bank/investment accounts need new registrations naming the trust or a transfer to trust-owned accounts.
• Retirement plans usually should not be retitled; instead name appropriate beneficiaries and coordinate with the trust and tax-advisor because IRAs have special tax rules.

A practical resource: compare Revocable vs Irrevocable approaches before transferring titles — our comparison page walks through common scenarios and pitfalls.

Internal link: Revocable vs Irrevocable Trusts: Pros and Cons

Tax and legal considerations (brief, high-level)

• Federal estate, gift, and generation-skipping transfer (GST) taxes may apply depending on value and current law. Exemption amounts and rules change over time; consult the IRS site for current thresholds and guidance. (See IRS: Estate and Gift Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes)
• Grantor trusts have special tax rules — income may be taxed to the grantor even if the trust earns income. Irrevocable trusts can be separate taxpayers, with their own tax rates and filing requirements.
• Medicaid and asset-test rules vary by state. Using an irrevocable trust for Medicaid planning may require a five-year look-back and careful timing; check state rules and consult an elder-law attorney or planner.

Authoritative references: Internal Revenue Service (IRS) and Consumer Financial Protection Bureau (CFPB). For federal tax guidance see the IRS estate-and-gift page cited above; for consumer-facing planning guidance see CFPB’s estate-planning resources (https://www.consumerfinance.gov/consumer-tools/estate-planning/).

Common misconceptions and mistakes

• “All trusts avoid probate.” Not true — only assets properly funded into a revocable trust will typically avoid probate; testamentary trusts by definition are part of probate.
• “Irrevocable = no benefit to grantor.” Irrevocable trusts can provide income or discretionary distributions depending on how they’re drafted; they simply limit the grantor’s ability to unilaterally change or reclaim trust property.
• “Trusts eliminate all taxes.” Trusts change tax timing and responsibility but do not automatically eliminate federal or state taxes.
• Not funding the trust and failing to coordinate beneficiary designations (especially on retirement accounts) are two of the most common, easily avoidable errors.

How to choose the right trust: a practical checklist

1. Define the goal: probate avoidance, tax reduction, creditor protection, special-needs support, charitable giving, or business succession.
2. Inventory assets: identify real estate, investment accounts, business interests, and retirement accounts — each may require different treatment.
3. Consider timing: do you need immediate protections or post-death distributions only?
4. Consult specialists: estate planning attorneys for state-law trusts, tax advisors for tax consequences, and financial advisors for funding and liquidity planning.
5. Review and update: life changes (marriage, divorce, birth, death, relocation) often require trust updates or re-funding.

In my experience, clients benefit most from a coordinated team: an estate attorney who drafts enforceable documents, a CPA or tax advisor who models tax outcomes, and a financial planner who implements funding and liquidity strategies.

Short FAQs

• Can a revocable trust protect against lawsuits? Generally no — while it can ease transfers, a revocable trust provides limited creditor protection because the grantor retains control.
• Does a trust replace a will? Not always. Many planners use a “pour-over will” with a revocable trust to catch assets not transferred during life. A will also handles guardianships for minor children.
• Are trusts public records? Revocable trusts that properly hold assets typically avoid probate and stay private; wills probated in court do enter public record.

Next steps (recommended resources and links)

• Read our step-by-step: Revocable Living Trust
• If insurance liquidity or estate-tax planning is a concern, review: Irrevocable Life Insurance Trust (ILIT)
• Compare options for a practical side-by-side: Revocable vs Irrevocable Trusts: Pros and Cons

Professional disclaimer

This article is educational and general in nature and does not constitute legal, tax, or investment advice. Trust laws, tax rules, and exemption amounts change; consult a qualified estate attorney and tax professional to design and implement trust documents tailored to your situation.

Sources and further reading

• Internal Revenue Service — Estate and Gift Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
• Consumer Financial Protection Bureau — Estate planning: https://www.consumerfinance.gov/consumer-tools/estate-planning/
• FinHelp guides: Revocable Living Trust; Irrevocable Life Insurance Trust (ILIT); Revocable vs Irrevocable Trusts: Pros and Cons