Use Cases for Common Types of Trusts

If you are starting the estate planning process, you may have heard that a trust is a useful legal arrangement for protecting and distributing assets. Let’s look at eight common types of trusts and how they are used. Note that this is a general overview and is not meant to provide specific guidance. You should seek the guidance of a financial professional with estate planning experience to help you decide which trust, if any, is right for your situation.

Revocable Living Trust

A revocable living trust gives you flexibility and control over your assets during your lifetime and the ability to change or revoke the trust at any time. It protects your assets if you become incapacitated and can save your loved ones’ time and money, as well as protect their privacy, by making probate unnecessary for asset transfer after you pass away.

Use case examples:

• A mother creates a revocable living trust to simplify the probate process, ensuring her assets transfer smoothly to her three children while retaining her ability to move assets in and out of the trust as she sees fit.
• A single man with a family history of Alzheimer’s disease creates a revocable living trust to ensure his nephew, who will serve as the trustee, will manage his assets in case he becomes incapacitated.

Irrevocable Trust

Irrevocable trusts bypass the probate process, protect assets from creditors and legal judgments, and reduce the grantor’s tax liability, but they are difficult to change or cancel. Money, property, or other assets that you place into this trust are permanently removed from your estate to be managed and distributed to your beneficiaries by your trustee when you pass away.

Use case examples:

• A surgeon establishes an irrevocable trust to protect a portion of her assets for her beneficiaries if she ever faces malpractice litigation.
• Wealthy retirees with a sizeable estate want to leave assets to their children and grandchildren without incurring a significant inheritance tax.

Testamentary Trust

Testamentary trusts are established after the grantor passes away, based on instructions left in their will for an executor. A named trustee manages assets on behalf of the beneficiaries until predetermined conditions outlined in the will are met. As with other trusts, the assets do not go through probate.

Use case examples:

• Parents of four children, ranging in age from 2 to 15, create a testamentary trust and stipulate that distributions should be made to each of their children based on the children’s ages and specific needs at the time of the parents’ passing.
• A grandmother stipulates that her grandchildren will receive portions of their inheritance at certain ages or milestones – like college graduation, marriage, or the birth of their first child – instead of receiving a lump sum.

Special Needs Trust

Sometimes referred to as a supplemental needs trust or SNT, a special needs trust is established to benefit people with a physical or mental disability or a chronic illness. The funds in the trust can be used for whatever the beneficiary needs – commonly for things like home care, medical expenses, and housing and transportation costs. Keeping the funds inside the trust helps ensure that the beneficiary can still qualify for government assistance.

Use case examples:

• A married couple establishes a special needs trust for their daughter with cerebral palsy that would cover her housing and personal needs without reducing her eligibility for government benefits provided by Social Security, Supplemental Security Income, or Medicaid.
• A woman who cares for her brother with severe autism establishes a special needs trust that will ensure he still has access to resources beyond what public benefits could provide if she passes away before him.

Charitable Trust

You can leave your assets to a tax-exempt nonprofit or charitable organization close to your heart with either a charitable lead trust or a charitable remainder trust. Both types allow you to provide tax-efficient support for a charity or nonprofit you value while creating potential income for yourself and your heirs.

Use case examples:

• A married couple whose child received lifesaving treatment at a nonprofit hospital creates a charitable remainder trust, securing lifetime income and future support for the hospital’s continued service to other families.
• A longtime Habitat for Humanity volunteer and donor establishes a charitable lead trust, ensuring annual donations to the nonprofit housing organization with a remainder interest to their children, promoting continued philanthropy while planning for the family legacy.

Explore Your Options

Trusts can be valuable tools in estate planning, and a trusted financial professional with estate planning experience can advise you on which type of trust would fit your estate planning needs and goals and explain how each type of trust is handled in your state.