One of our primary focuses at I&E is wealth building. But what is the point of building wealth if you do not take the necessary steps to protect your wealth? One such way is by proper estate planning, such as the use of one of the trusts mentioned below.
Table of Contents
- Revocable vs Irrevocable Trusts: The Foundation of Trust Planning
- 16 Different Types of Trusts
- Revocable Living Trust
- Testamentary Trust
- Irrevocable Life Insurance Trust (ILIT)
- Crummey Trust
- Special Needs Trust
- Charitable Trusts
- Intentionally Defective Grantor Trust (IDGT)
- Grantor Retained Annuity Trust (GRAT)
- Custodial Trust
- Totten Trust
- Spendthrift and Asset Protection Trusts
- Tax Bypass Trust
- QTIP Trust
- Deferred Sales Trust (DST)
- Digital Asset Trust
- Constructive Trusts
- Case Study: Multi-Trust Strategy
- Future Trends in Trust Planning
- Conclusion
Revocable vs Irrevocable Trusts: The Foundation of Trust Planning
Trusts come in a wide assortment, each type designed for a specific purpose. But even with all the variety, every trust will fit into one of two broad categories: revocable vs irrevocable trusts.
Revocable trusts are created during the lifetime of the grantor (the person establishing the trust) and can be modified or revoked at the grantor’s discretion. According to current data, these represent approximately 41% of all estate plans and are particularly popular in suburban areas.
Irrevocable trusts, on the other hand, cannot be modified, revoked, or amended by anyone after the trust has been established. These represent about 28% of trusts and are particularly favored by high-net-worth individuals, with 63% of estates valued at over $1 million using irrevocable structures.
This distinction of “control” between revocable and irrevocable trusts is especially important for tax purposes, as the grantor is generally considered to still have control over assets in a revocable trust.
Within the broad categories of revocable and irrevocable trusts, there are scores of specialized types of trusts, each designed to serve a specific purpose.
In practice, there can be some overlap among the specific types, so a single trust may have elements of more than one trust-type.
It’s also worth noting that state law pertaining to trusts varies substantially among the states, so a trust that is an effective tool in one state might be pointless or invalid in another.
To describe every specialized trust in a single article would be impossible (and overwhelming to the reader). So, this list should not be viewed as all-inclusive. But, with that said, what follows is a description of some of the most popular and useful trusts.
The Estate Planners Tactical Guide
Essential Legal Protection for Achievers
16 Different Types of Trusts
1. Revocable Living Trust
A revocable living trust is a common and effective estate planning tool because it allows assets to avoid probate and thereby keep the estate private.
The trust is usually set up so that the grantor is both the trustee and beneficiary during his or her life. Then, upon the grantor’s death, a successor trustee takes over administration of the trust, distributing the trust assets to beneficiaries as directed by the grantor in the declaration of trust (the instrument that created the trust).
Revocable living trusts are often referred to as “inter vivos trusts,” though, technically “inter vivos” just means that the trust was created while the grantor was alive (as opposed to a testamentary trust, which takes effect upon the grantor’s death).
Inter vivos trusts can be, and often are, irrevocable because a trust must be irrevocable to avoid estate taxes. A revocable living trust does not avoid estate taxes because the trust’s assets are still controllable by the grantor and therefore considered part of the estate for estate tax purposes.
However, with recent substantial increases to the federal estate exemption amount (currently $13.99 million per individual), estate taxes have become less of an issue for most estates. Keep in mind, though, that this exemption is scheduled to sunset in 2026, so planning ahead is crucial.
Cost: Typically $1,500-$3,000 for setup with an annual asset management fee of about 0.5%. Note that I work with a company offering an online trust creation for $1995 that includes free lifetime updates, which can represent significant savings over traditional trust preparation methods.
Common Misconception: Many people believe revocable trusts provide tax benefits, but they don’t actually shield assets from taxation.
2. Testamentary Trust
“Testamentary trust” is a general term for a trust created by a last will and testament. By definition, a testamentary trust is irrevocable because it does not take effect until after the grantor’s death, at which point the grantor can no longer make changes to the trust.
Different types of specialized trusts can be testamentary trusts. For example, a trust established in the grantor’s will and designed to provide for the care of the deceased grantor’s minor children until they reach adulthood would be both a testamentary trust and a custodial trust.
Testamentary trusts work in conjunction with “pour-over” wills, which complement the trust by ensuring any assets not already in the trust at the time of death are “poured over” into it.
3. Irrevocable Life Insurance Trust (ILIT)
Under an Irrevocable Life Insurance Trust, a/k/a ILIT, the trust is the owner and beneficiary of a life insurance policy covering the grantor. When the policy pays out at the grantor’s death, the proceeds go to the trust and are distributed by the trustee according to the terms of the trust instrument.
Because the trust is irrevocable, policy proceeds are not included within the grantor’s estate.
Often, the ILIT will use guaranteed universal life, since it is permanent life insurance protection but focused more on death benefit, rather than on cash value growth.
ILITs are commonly used to ensure that funds are available to pay estate taxes due on other assets (especially non-liquid assets) or for funeral or estate administration expenses. Many ILITs use Crummey Powers to fund the ILIT.
Requirements: The trust must be irrevocable, and the trustee cannot be the insured person. In community property states, spousal consent is typically required.
Tax Treatment: The trust pays income tax, but proceeds are excluded from estate tax and can be exempt from generation-skipping transfer (GST) tax.
4. Crummey Trust
Crummey trusts are designed to take full advantage of the annual tax-free gift maximum ($17,000 for 2025). Trust beneficiaries are allowed to exercise temporary control of gifted assets for a brief period before the assets are transferred to the trust, thereby ensuring that the transfer qualifies as a “gift.”
The brief control is necessary because transfers to trusts are not usually considered “gifts” under the tax code.
Then, the trustee takes control and distributes an allotted annual amount from the trust to the beneficiaries.
A Crummey trust is useful in reducing the size of an estate over time without giving beneficiaries unlimited control over the transferred assets.
The disadvantage is that the beneficiary has to cooperate. If he or she withdraws the gifted amount during the temporary period of control, the purpose of the trust is defeated.
5. Special Needs Trust
Special needs trusts are designed to allow a disabled beneficiary to remain eligible for government benefits when receiving a large payment – such as through an inheritance, gift, or legal settlement. The trust must be irrevocable, and a third-party trustee manages the assets and makes distributions according to the purposes described in the trust instrument.
Commonly, a special needs trust provides for the beneficiary’s medical expenses, education, transportation costs, insurance premiums and other fixed expenses, and life necessities.
Special needs trusts are frequently created as part of the estate plan of parents of disabled children or as part of an agreement settling a lawsuit. If the trust is self-settled (where the beneficiary’s assets fund the trust), stricter rules apply to the creation and administration of special needs trusts.
Currently, special needs trusts account for about 18% of all trusts and are growing at approximately a 7% annual rate. Their primary benefit is preserving Medicaid eligibility while providing for supplemental needs not covered by government benefits.
Key Drawback: These trusts require strict distribution rules to ensure compliance with government benefit regulations.
6. Charitable Trusts
Several types of irrevocable charitable trusts have the common features of benefiting a specific charity or the public at large while conferring tax benefits on the grantor.
A Charitable Remainder Trust (CRT) is an inter vivos trust under which the grantor receives trust income during his or her life (or another term specified in the trust declaration), and the remainder is distributed to the designated charity upon the grantor’s death or the expiration of the trust. The grantor receives a partial tax deduction at the time the trust is funded.
A Charitable Remainder Annuity Trust (CRAT) pays the beneficiary a fixed annuity each year during the term of the trust, while a Charitable Remainder Unitrust (CRUT) pays the grantor a designated percentage (at least 5%) of trust assets. With either, the charity receives the remainder.
A new trend is the emergence of Hybrid Charitable Trusts that combine features of different charitable trust structures to maximize both philanthropic impact and tax benefits.
Charitable trusts can be useful in reducing capital gains taxes on assets with substantial appreciation, as the grantor is not taxed on the assets used to fund the trust at the time of transfer.
7. Intentionally Defective Grantor Trust (IDGT)
An IDGT is designed for assets expected to appreciate. The trust allows the grantor to “freeze” the value of the property and avoid capital gains on the transferred assets.
How it works is that the grantor “sells” property to the irrevocable trust pursuant to a promissory note, but the trust instrument is intentionally flawed so that the assets in trust remain the grantor’s property for income tax purposes (but not for estate taxes).
The grantor pays income tax on the growth during the term of the trust, and, when the trust expires, the trust assets are distributed to the beneficiary.
The benefit of an IDGT is that it reduces the size of the grantor’s taxable estate (because the trust is irrevocable) and allows the beneficiaries to receive tax-free the growth earned by the assets held in the trust during the term.
8. Grantor Retained Annuity Trust (GRAT)
The theory behind a GRAT is to reduce the taxes on assets expected to appreciate quickly. The trust is set up so that the grantor transfers the asset or assets into the trust, pays the tax due upon funding, and then receives an annuity payment from the trust each year equal to an anticipated return rate as set by the IRS. At the end of the term of the trust, the beneficiary receives the remainder.
If the asset beat the IRS expected rate, the beneficiary will receive all of the growth (what is left in the trust) tax free. However, if the growth does not outpace the IRS rate, the grantor will have received all of the trust property back.
A drawback of GRATs is that, if the grantor dies during the trust term, the trust assets revert to the estate and are subject to estate taxes.
9. Custodial Trust
Custodial trusts are set up to manage assets on behalf of a disabled, incapacitated, or minor beneficiary. The grantor can be another person, such as a parent, or the trust can be funded from the assets of the beneficiary him or herself.
A typical use of custodial trusts is to protect assets of a minor who receives a substantial inheritance but is not yet mature enough to manage the assets. In that scenario, the trust usually terminates when the minor beneficiary reaches the age of majority, or another age at which the grantor believes the minor will be sufficiently responsible (twenty-five is a popular number).
Custodial trusts can also be used to hold funds earned by a minor who has an unusually large income, such as a child actor, until adulthood. Usually, the trustee is authorized to make distributions to the beneficiary for costs of education, healthcare, and other necessary living expenses until the trust terminates, at which time the trust assets become the property of the beneficiary.
10. Totten Trust
Also called a “poor man’s trust,” a Totten trust simply involves a grantor’s depositing assets in a bank account with a “payable on death” beneficiary, AKA POD account.
Both the grantor’s and beneficiary’s names will be on the account (e.g., “John Smith, payable on death to Johnny Smith, Jr.”), but the grantor controls the account until the grantor’s death, at which time it becomes the property of the beneficiary.
Totten trusts are popular because they are simple and inexpensive to establish โ not requiring any formal trust declaration โ and because they allow the account assets to avoid probate.
The downside of Totten trusts is that their use is limited to financial accounts and similar property โ they cannot be used with less liquid assets like, for example, real estate.
11. Spendthrift and Asset Protection Trusts
Asset protection trusts (AKA Domestic Asset Protection Trust or DAPT in some states) and spendthrift trusts are related irrevocable trusts designed to protect assets from creditors and avoid mismanagement of funds by beneficiaries.
Assets held in the trust cannot be reached by creditors until distributed to the beneficiary. A third-party trustee manages distributions, which are made to the beneficiary subject to the terms of the trust, but with the trustee having significant discretion.
Asset protection trusts represent about 13% of all trusts and are particularly popular in debtor-friendly states. Their effectiveness varies substantially by state, with Nevada and Delaware offering stronger protections than states like California or Texas.
Typical Costs: $5,000-$15,000 for setup when using a corporate trustee.
To protect creditors, most states have laws limiting asset protection and spendthrift trusts. Some states do not permit them at all if the grantor is the beneficiary, or state law might require that there be at least one additional beneficiary.
Most states also have exceptions allowing attachment of trust assets to recover certain debts, such as alimony, child support, and taxes or fees owed to the government.
In a few states, creditors can attach trust assets if the creditor’s claim arose prior to the creation of the trust.
For tax purposes, trust income is usually taxable to the grantor, with distributions to any other beneficiaries treated as a gift from the grantor.
12. Tax Bypass Trust
Alternatively known as “bypass trusts” or “AB trusts,” tax bypass trusts are used by spouses to take maximum advantage of estate tax exemptions. The strategy involves both spouses irrevocably transferring some or all of their assets to essentially two trusts when the first spouse dies.
The first trust is funded up to the maximum estate tax exemption amount. The surviving spouse is the beneficiary of and is supported by the first trust (the “bypass trust”) but does not legally own the assets or control the trust. The surviving spouse does, however, control the second trust. When the surviving spouse dies, an ultimate beneficiary receives the assets held in both trusts.
An AB trust avoids or reduces estate taxes by using the maximum exemption amount for both spouses. The first spouse’s maximum exemption is applied to the assets in the bypass trust. The remaining assets are not subject to estate taxes upon the first spouse’s death due to the unlimited exemption for estate transfers between spouses.
Thus, upon the death of the second spouse, the final beneficiary will only have to pay estate taxes on the amounts in the second trust (the trust controlled by the second spouse) to the extent the asset value exceeds the maximum exemption amount. Because the bypass trust is irrevocable, its assets are not included within the surviving spouse’s estate.
AB trusts have become less common and less useful recently due to substantial increases in the estate tax exemption. The current $13.99 million exemption is large enough to include all of the assets of most estates โ making an AB trust unnecessary. However, the exemption amount is scheduled to revert to approximately $7 million in 2026, at which time the AB trust may again become a useful estate-planning tool for more people.
13. QTIP Trust (Qualified Terminable Interest Property Trust)
A QTIP trust is a testamentary trust under which estate assets are transferred to a trust to provide for the support of a surviving spouse during the surviving spouse’s life, after which the assets are distributed according to the terms of the trust instrument, as designated by the first spouse. QTIP’s are common among spouses who are in second marriages and have children from a prior marriage.
A similar type of trust to the QTIP for foreign nationals and non-US residents is the QDOT, or Qualified Domestic Trust, which allows the non-resident spouse to claim the marital deduction.
14. Deferred Sales Trust (DST)
A Deferred Sales Trust is a tax deferral strategy based on IRC Section 453, which governs installment sales. It allows sellers of highly appreciated assets, such as businesses, real estate, or investment portfolios, to defer capital gains taxes that would otherwise be due upon sale.
The process works through several key steps:
- A third-party company establishes a dedicated trust for your transaction
- Instead of selling your asset directly to a buyer, you sell it to the DST in exchange for an installment note (typically over 10 years at a predetermined interest rate, often around 5%)
- The trust then sells the asset to the actual buyer at the same price
- Because you haven’t received the full proceeds upfront but instead will receive payments over time via the installment note, you only pay capital gains taxes as you receive each payment from the trust
- The trust reinvests the sale proceeds according to agreed-upon parameters, with the goal of generating returns to fund your installment payments
One of the key benefits of DSTs is that they provide an alternative to 1031 exchanges. Unlike a 1031 exchange, which requires reinvestment in “like-kind” property under tight deadlines, a DST allows for diversification of investments and doesn’t impose the same stringent timeline requirements. DSTs can even serve as a “rescue” for a failed 1031 exchange when a suitable replacement property cannot be found within the required timeframe.
However, DSTs do have some potential drawbacks, including increased IRS scrutiny in recent years and significant feesโapproximately 2% of the transaction value upfront and roughly 1.5% annually. Additionally, as a creditor of the trust rather than a beneficiary, you receive only your promised interest rate regardless of how the trust’s investments perform.
DSTs are typically most appropriate for those with shorter investment timeframes (under 10 years) who need tax deferral but plan to use the proceeds relatively soon, and for those seeking an alternative to 1031 exchanges.
15. Digital Asset Trust
A newer development in trust planning is the digital asset trust, specifically designed to manage cryptocurrencies, NFTs, online accounts, and other digital assets. These trusts have seen a remarkable 68% growth since 2022.
Digital asset trusts typically include:
- Provisions for crypto wallet management
- Social media legacy clauses
- NFT ownership transfers
- Digital executor designation
- Encryption key management protocols
Because digital assets present unique challenges regarding access, security, and transfer, these specialized trusts have become increasingly important for modern estate planning.
16. Constructive Trusts
A final form of trust worth mentioning is the constructive trust, or “implied trust.”
Constructive trusts are never formally created but, instead, are declared by a court based upon a fact-pattern suggesting that the property within the constructive trust should be used for the benefit of a person other than the person holding legal title.
Typically, a court finds that the property subject to the constructive trust was obtained wrongfully and should in all rights belong to the other individual, and so the court orders transfer of legal title.
An example of a constructive trust would be if one person owing a fiduciary duty to another wrongfully acquires property in his or her own name using assets belonging to the person to whom the duty was owed.
A court might hold that the property was held subject to a constructive trust and order the legal owner to transfer title to the person who has been wronged.
Case Study: Multi-Trust Strategy
To illustrate how different trusts can work together, consider this example of a tech entrepreneur’s estate plan:
- A GRAT for rapidly appreciating stock options
- A DAPT for general liability protection
- An ILIT for a $5M life insurance policy
- A Charitable Remainder Trust for low-basis stock donations
This strategic combination reduced the taxable estate by 62% while maintaining liquidity for the family and supporting philanthropic goals.
Future Trends in Trust Planning
As we look ahead to the rest of 2025 and beyond, several important trends are shaping trust planning:
- Preparations for the 2026 TCJA sunset, which will reduce the estate tax exemption
- Updates to the Uniform Trust Code regarding digital asset standardization
- The testing of AI-assisted trust administration by about 23% of firms
Conclusion
There are many different types of trusts available and the right one for you will depend on your own unique set of circumstances. The key is to work with knowledgeable professionals who can help you navigate the complex world of trusts to create a plan that protects your wealth and accomplishes your goals.
With the estate tax exemption scheduled to decrease in 2026, now is an excellent time to review your estate plan and consider whether one or more trusts might be appropriate for your situation. 89% of estate planning attorneys currently recommend leveraging the current high exemptions before they sunset.
If you have any questions about which trust might be right for your situation, please leave us a comment below. We would love to hear from you.
