What Are the Different Types of Trusts, and How Do They Work?
May 27, 2025
When it comes to managing assets and planning for the future, trusts can play a powerful role. A trust is a legal arrangement that allows one party to hold and manage assets for the benefit of another. Trusts can help individuals control how their wealth is distributed, minimize taxes, and protect assets from creditors.
Working with an experienced trust attorney is often essential to set up the right trust to match specific needs and goals. At the Law Office of Blake P. Lipman in Farmington Hills, Michigan, clients receive guidance on how different types of trusts work and which options best suit their circumstances.
Whether planning for children, charitable giving, or long-term care, understanding the basics of trusts can make all the difference. Read on to learn more about the different types of trusts and how they operate.
Revocable Trusts
Revocable trusts are one of the most commonly used tools in estate planning. These trusts allow the person who creates the trust, known as the grantor, to modify, amend, or revoke the trust during their lifetime. Because of this flexibility, many people use revocable trusts to manage their assets while maintaining control.
A trust attorney can help draft a revocable trust that not only addresses the grantor’s needs but also streamlines the transfer of assets after death. Since revocable trusts avoid probate, they can offer more privacy and quicker distribution of assets to beneficiaries.
However, because the grantor maintains control, assets within a revocable trust are still considered part of the grantor's estate for tax purposes.
Irrevocable Trusts
Irrevocable trusts are designed to provide asset protection and potential tax advantages by permanently transferring ownership of assets out of the grantor’s estate. Once created, an irrevocable trust can’t easily be changed or terminated without the approval of the beneficiaries and the court.
A trust attorney will explain that while irrevocable trusts limit the grantor's control, they can offer significant benefits. These include shielding assets from creditors, reducing estate taxes, and qualifying for Medicaid planning.
Once assets are placed into an irrevocable trust, they’re no longer considered part of the grantor's taxable estate, which can lower estate tax liability. Since irrevocable trusts have strict rules, it’s important to fully understand their implications before setting one up.
Testamentary Trusts
Testamentary trusts are created through a will and only come into effect after the grantor’s death. Unlike revocable or irrevocable living trusts, these trusts aren’t operational during the grantor’s lifetime. They allow a person to control how assets are distributed after they pass away.
A trust attorney often recommends testamentary trusts when a client wants to make sure minor children, disabled loved ones, or beneficiaries who may not manage money well receive their inheritance in a structured way. Since testamentary trusts are created by the will, they must go through probate, but they can still offer valuable control over asset distribution.
Understanding how testamentary trusts work naturally leads to examining another category—special needs trusts.
Special Needs Trusts
Special needs trusts are tailored to benefit individuals with disabilities without disqualifying them from government benefits like Medicaid or Supplemental Security Income (SSI). These trusts allow a beneficiary to receive financial support without jeopardizing their eligibility for public assistance.
A trust attorney can assist in setting up a special needs trust that meets both state and federal guidelines. The trust can pay for supplemental needs, such as education, travel, entertainment, and personal care, providing a higher quality of life for the beneficiary. Special needs trusts come in first-party and third-party forms, depending on who funds them.
Charitable Trusts
Charitable trusts are used to benefit a charitable organization while offering tax advantages to the grantor. They can be structured to provide income to the grantor or other beneficiaries for a set period before donating the remaining assets to charity.
Some important points to think about when considering a charitable trust include:
Charitable remainder trusts: These allow the grantor or other non-charitable beneficiaries to receive income for a period before the remainder goes to the chosen charity.
Charitable lead trusts: These provide income to a charity for a specified time, after which the remaining assets pass to non-charitable beneficiaries.
A trust attorney can help make sure that charitable trusts meet IRS requirements to preserve their tax-favored status. As individuals consider charitable giving, they might also want to look into asset protection trusts as a tool for safeguarding wealth.
Asset Protection Trusts
Asset protection trusts are specifically designed to shield assets from creditors, lawsuits, or other claims. These types of trusts are usually irrevocable and are often established in jurisdictions with favorable asset protection laws.
A trust attorney works with clients to set up asset protection trusts that offer strong legal defenses while meeting applicable regulations. They’re frequently used by professionals in high-risk industries or individuals with significant wealth who want to guard against unforeseen liabilities.
Generation-Skipping Trusts
Generation-skipping trusts allow a grantor to transfer assets directly to grandchildren or even great-grandchildren, bypassing their own children to minimize estate taxes. These trusts can significantly reduce the impact of the federal generation-skipping transfer (GST) tax if structured properly.
A trust attorney helps draft generation-skipping trusts that meet the strict tax code requirements. These trusts can be a strategic way to preserve wealth across multiple generations, making sure that family assets are protected and efficiently distributed.
Qualified Personal Residence Trusts
Qualified personal residence trusts (QPRTs) allow individuals to transfer their home or vacation property out of their estate while still living there for a set period. After the term ends, the property passes to designated beneficiaries at a potentially reduced gift tax cost.
Some important considerations when setting up a QPRT are:
Length of retained interest: The grantor must survive the trust term for the transfer to be effective.
Valuation for gift tax purposes: The value of the gift is reduced based on the retained interest, resulting in lower gift taxes.
Ongoing use of the property: After the term ends, the grantor may need to pay rent to continue using the home.
A trust attorney can guide clients through creating a QPRT that fits within an overall estate plan.
Credit Shelter Trusts
Credit shelter trusts, also known as bypass trusts, are a popular strategy for married couples to reduce estate taxes. When the first spouse dies, part of the estate is placed into the trust, using the deceased spouse's estate tax exemption. The surviving spouse can access the trust income and principal under certain conditions.
A trust attorney assists in drafting credit shelter trusts that fully utilize both spouses' estate tax exemptions. This strategy can significantly lower or eliminate federal estate taxes upon the death of the surviving spouse, preserving more wealth for heirs.
Grantor Retained Annuity Trusts
Grantor retained annuity trusts (GRATs) are advanced estate planning tools that allow a grantor to transfer asset appreciation to beneficiaries with minimal gift tax consequences. The grantor places assets into the GRAT and receives an annual annuity payment for a set number of years.
A trust attorney helps structure GRATs to maximize the chances of passing significant wealth with little to no gift tax. If the assets appreciate more than the IRS-assumed interest rate, the excess value passes to the beneficiaries tax-free. GRATs are often used for transferring assets that are expected to grow rapidly in value.
Life Insurance Trusts
Life insurance trusts, or irrevocable life insurance trusts (ILITs), are used to remove life insurance proceeds from a person’s taxable estate. The trust becomes the owner and beneficiary of the life insurance policy, and after the insured person’s death, the trust distributes the funds according to its terms.
A trust attorney plays a key role in properly setting up an ILIT to avoid estate taxes on life insurance payouts. This structure can provide liquidity to pay estate taxes, debts, or provide for heirs without increasing the taxable estate.
Retirement Plan Trusts
Retirement plan trusts are used to manage the distribution of assets from IRAs, 401(k)s, and other retirement accounts after death. By using a retirement plan trust, beneficiaries can have greater control over how these funds are distributed, helping to maximize tax benefits and protect assets from creditors.
A trust attorney can draft retirement plan trusts that comply with IRS rules, particularly the SECURE Act, which affects how retirement account distributions must be handled. With proper structuring, these trusts can help stretch out the tax-deferred growth of retirement assets for heirs.
By working closely with a trust attorney, clients can create solid estate plans that protect assets and provide peace of mind for the future.
Contact a Trust Attorney Today
The trust attorney at the Law Office of Blake P. Lipman can help create customized trusts that fit your needs and provide long-term benefits. Located in Farmington Hills, Michigan, the firm serves clients throughout the Detroit Metropolitan area and the Tri-County area, including Oakland, Wayne, and Macomb. Contact the Law Office of Blake P. Lipman today to schedule a consultation and discuss your trust planning options.