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Types of Trusts [Top 15 Best Kinds To Know]

Fact Checked by Jason Herring & Barry Brooksby
Licensed Agents & Life Insurance Experts.
Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.
different types of trusts

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.

Revocable vs Irrevocable Trusts

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.

Irrevocable trusts, on the other hand, cannot be modified, revoked, or amended by anyone after the trust has been established.

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.

15 Different Types of Trusts

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, estate taxes have become less of an issue for most estates.

Testamentary Trust

“Testamentary trust” is a general term for a trust created by a will.  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.

Irrevocable Life Insurance Trust (ILIT)

Under an 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.

ILIT’s 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.

Crummey Trust

Crummey trusts are designed to take full advantage of the 2018 $15,000 annual tax-free gift maximum.  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.

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.

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 pays the grantor a designated percentage (at least 5%) of trust assets.  With either, the charity receives the remainder.

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.

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.

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 GRAT’s is that, if the grantor dies during the trust term, the trust assets revert to the estate and are subject to estate taxes.

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.

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 – not requiring any formal trust declaration – 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 – they cannot be used with less liquid assets like, for example, real estate.

Spendthrift and Asset Protection Trusts

Asset protection trusts (AKA Domestic Asset Protection Trust DAPT is 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.

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.

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 $11.18 million exemption is large enough to include all of the assets of most estates – making an AB trust unnecessary.  However, the exemption amount is scheduled to revert to $5.6 million in 2025, at which time the AB trust may again become a useful estate-planning tool for more people.

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.

Clifford Trust

A Clifford trust is a once-popular, specialized irrevocable trust used to reduce taxes on investment income.  The trust is established for a defined period – at least ten years – after which time the trust assets revert to the grantor.  During the term of the trust, all of the trust income is paid to a beneficiary.

Under former tax rules, taxes on the trust income was paid by the beneficiary, who ideally has a lower rate than the grantor.  However, current rules require Clifford trust income to be taxed to the grantor, making Clifford trusts less advantageous and less common in recent years.

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.


There are many different types of trusts available and the right one for you will depend on your own unique set of circumstances. If you have any questions, please leave us a comment below. We would love to hear from you.


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