The Four Different Types of Trusts

In estate planning, trusts can be established to easily transfer assets to heirs. With the right set-up, assets in a trust can avoid both probate and taxation, and can immediately pass from the original owner to the heirs.

There are four main categories of trusts, based on when the trusts go into effect and who owns the assets in the trust.

Living trusts vs. testamentary trusts

All trusts are set up by you, the grantor, during your life. However, not all trusts immediately go into effect. Depending on when the trust becomes effective, it is either a living trust or a testamentary trust. 

Living trusts: When a trust is created and then immediately become effective, it is known as a “living trust.” 

Testamentary trusts: When a trust is created and then does not become effective until after your death, it is known as a “testamentary trust.” In the case of testamentary trusts, you, as the person creating the trust, are called the “testator.” Testamentary trusts are often created within wills.

Revocable trusts vs. irrevocable trusts

All trusts are either revocable or irrevocable. 

Revocable trusts: You retain ownership and control of the property in the trust and can change the terms of the trust, including the trustees and beneficiaries

Irrevocable trusts: You give ownership and control of the property in the trust to others (trustees) and therefore no longer own or control the property, thus making you unable to enact changes to the the trust. 

Tax implications during your life

With a revocable trust you are still treated as the owner of the property in the trust, and can therefore be taxed on that property during your life. With an irrevocable trust, you give up ownership of the property in the trust and are therefore no longer liable for that property and cannot be taxed on that property. 

Reasons for choosing a revocable trust vs. an irrevocable trust

Depending on the goals of the trust that you’re establishing, there may be some benefits to creating either a revocable trust or an irrevocable trust. For example, if the primary goal of the trust is to avoid excessive estate taxes, you will likely want to set up an irrevocable trust, as you would not pay taxes on property held in an irrevocable trust. However, if the primary goal of the trust is to maintain control of assets in the event of incompetence, you will likely want to set up a revocable trust, as you will retain control over the assets in the trust and the beneficiaries of that trust until you die. In addition, the rules of the particular trust that you’re establishing may dictate whether a trust must be revocable or irrevocable. If you’re unsure whether you want to establish a revocable or irrevocable trust, you should consult a licensed trusts and estates attorney in your state.

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