What Is a Trust?
Updated: Oct 15
A trust is a legal arrangement that allows someone to place assets under the care of a person or organization to manage for the benefit of someone else. Depending on how it's created, a trust can be used to manage money, distribute property, provide for family members, or carry out specific instructions during your lifetime or after your death.
Trusts are often associated with wealthy families, but they can serve a variety of purposes. Someone might use a trust to manage an inheritance for a child, provide ongoing support for a family member, or decide how certain assets should be handled if they become unable to manage them independently.
The important thing to understand is that a trust isn't a single document with one standard purpose. Different types of trusts work in different ways, and choosing the right one depends on what you're trying to accomplish.
What Are the Different Types of Trusts?
Trusts can be created for different reasons, and each type has its own rules, benefits, and limitations. These are some common types you may encounter.
Revocable Living Trust
A revocable living trust is created during your lifetime and can generally be changed or canceled while you have the legal capacity to do so. You can often serve as the trustee and continue managing the assets placed in the trust. People commonly use these trusts to plan for incapacity and determine how certain assets will be distributed after death. Depending on how the trust is structured and funded, it may also help those assets avoid probate.
Irrevocable Trust
An irrevocable trust generally can't be freely changed or canceled once established. Depending on its terms and applicable law, changing it may require consent from certain parties or court approval. These trusts may be used for specific estate-planning, tax-planning, or asset-management goals, but they can involve giving up significant control over the assets. The consequences depend on the particular trust, so professional guidance is important.
Testamentary Trust
A testamentary trust is created through instructions in a will and generally takes effect after the person's death, once the will has gone through the applicable legal process. It can be used to manage an inheritance over time rather than distributing everything directly to a beneficiary. For example, a parent might establish a testamentary trust to provide financial support for a child until the child reaches a specified age. Because the trust is created through a will, its establishment generally involves probate.
Special Needs Trust
A special needs trust is designed to provide financial support for a person with a disability while helping preserve eligibility for certain means-tested public benefits when the trust meets the applicable requirements. The rules are complex, and not every trust protects benefit eligibility. These trusts should be established with advice from a professional familiar with disability-related benefits and trust law.
Charitable Trust
A charitable trust is established to benefit a charitable organization, a charitable purpose, or both. Depending on its structure, it may also provide benefits to the person creating the trust or their beneficiaries. Charitable trusts can have specific tax implications and aren't suitable for every estate plan.
Spendthrift Trust
A spendthrift provision places restrictions on a beneficiary's ability to transfer or pledge their interest in the trust. Depending on state law and the trust's terms, it may also limit a beneficiary's creditors from reaching certain trust assets. These provisions can be useful when someone wants to provide an inheritance while limiting how the beneficiary can access or transfer it. They don't provide absolute protection in every situation.
These categories aren't always mutually exclusive. A trust can have characteristics of more than one type, and the name alone doesn't tell you everything about how it works. The actual terms of the trust document and the law governing it determine what it can do.
Common Terms Used in a Trust
Trust documents often use legal terms that sound more complicated than they need to. Knowing the basic definitions makes it easier to understand who's involved and what their responsibilities are.
Grantor, settlor, or trustor: The person who creates the trust. These terms are often used interchangeably, depending on the document and jurisdiction.
Trustee: The person or institution responsible for managing the trust's assets and following its terms. A trustee has legal duties and must act according to the trust document and applicable law.
Successor trustee: The person or institution designated to take over as trustee when the current trustee can no longer or no longer will serve, as specified by the trust.
Beneficiary: The person or organization entitled to receive benefits from the trust, such as money, property, or income.
Trust assets or trust property: The money, real estate, investments, or other property held in the trust.
Trust document or trust agreement: The legal document that establishes the trust and explains how it should operate, including the trustee's responsibilities and the beneficiaries' rights.
Funding a trust: The process of transferring assets into the trust or taking the necessary steps to make them subject to it. For example, a home may need a properly prepared and recorded deed to transfer ownership to a trust.
Distribution: A payment or transfer of trust property to a beneficiary, according to the trust's terms.
Principal: The assets held in the trust, as distinguished from income those assets may generate. In some contexts, principal can also refer to the person who grants authority to an agent, so the meaning depends on the document.
Revocable: Generally means the trust can be changed or canceled by the person who created it, provided the legal requirements are met.
Irrevocable: Generally means the trust can't be freely changed or canceled by the person who created it, although certain changes may be possible under the trust's terms and applicable law.
Fiduciary duty: A legal obligation to act in the interests of the people the trustee is responsible for serving, in accordance with the trust's terms and applicable law.
Not every trust uses every term, and some documents use different wording for similar roles. If a term affects your rights or responsibilities, ask the attorney who prepared the document to explain how it applies to your particular trust.
How Do You Know Which Type of Trust Is Right for You?
The right trust depends on what you're trying to accomplish. Someone who wants to plan for managing their assets during their lifetime may consider a revocable living trust. Someone planning to provide long-term financial support for a beneficiary may need to explore a different arrangement.
Before choosing a trust, consider what you want it to accomplish, who should benefit, who will manage the assets, and how much control you want to retain. It's also important to understand the costs, tax consequences, reporting requirements, and legal responsibilities involved.
A trust isn't necessary for everyone, and creating one doesn't automatically protect assets from creditors, eliminate taxes, or avoid probate. Those outcomes depend on the type of trust, its terms, how it's funded, and the laws that apply.
An estate-planning attorney can help you compare options and determine whether a trust fits your circumstances. This is particularly important when planning for disability-related benefits, tax considerations, or the long-term management of an inheritance.
Final Thoughts
Trusts can be useful tools for managing property, providing for loved ones, and carrying out estate-planning goals. The challenge is understanding that different trusts serve different purposes, and the details matter.
Learning the terminology is a good starting point. Once you understand the basic roles and types of trusts, it's easier to identify the questions you need to ask and decide whether a particular arrangement makes sense for you.
Up Next: Now that we've covered what a trust is and how different trusts can be used, we'll take a closer look at one of the most common types used in estate planning: the living trust.
We'll explain how it works during your lifetime, how a successor trustee can step in if needed, and how a properly funded living trust may help certain assets pass to your beneficiaries without going through probate.
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