Types of Trusts and When to Use Them

The most important trust decision: revocable vs. irrevocable

Broadly speaking, the first task to figure out is whether you need a revocable or irrevocable trust.

A revocable trust is one you can change, cancel, or “revoke” (as the name implies) while you’re still alive. It’s commonly used to avoid probate, which can be a very slow, public, and costly process.

An irrevocable trust is one that is much harder to change once it’s set up. (In other words, it’s harder to revoke.) However, the upside is that you functionally no longer own the assets inside of an irrevocable trust, which means they’re shielded from creditors and also don’t count toward your taxable estate.

With those two broader types defined, here’s an overview of six common types of trusts:

Revocable living trust

• When this trust may make sense: A revocable living trust is often a good starting point if your primary goals are avoiding probate, maintaining privacy, and creating a plan for incapacity.

A revocable living trust is the most common type of trust used in estate planning. You transfer assets such as bank accounts, investments, or real estate into the trust and can continue managing them during your lifetime. Because the trust is revocable, you can update or dissolve it if your circumstances change.

One of its biggest benefits is that assets held in the trust generally bypass probate court, which can save time, reduce costs, and keep your affairs private. It can also provide continuity if you become incapacitated, since the successor trustee you’ve already chosen can step in and manage trust assets on your behalf.

The trade-off is that revocable living trusts generally don’t provide estate tax benefits or creditor protection. Because you retain control of the assets, they’re typically treated as part of your estate.

Credit shelter trust (bypass trust)

• When this trust may make sense: This trust is typically most relevant for affluent married couples whose estates could face federal or state estate taxes.

Many married couples don’t need a bypass trust. But if you’re concerned about estate taxes reducing what eventually reaches your heirs, it could be worth looking into. A credit shelter trust, sometimes called a bypass trust, can help married couples make full use of both spouses’ estate tax exemptions.

When the first spouse dies, a portion of the estate is transferred into the trust rather than passing directly to the surviving spouse. The surviving spouse can still use those assets during their lifetime, but they generally won’t be included in their taxable estate later.

Irrevocable life insurance trust (ILIT)

• When this trust may make sense: Consider discussing an ILIT with your planning team if life insurance is part of your wealth transfer strategy and estate taxes are a concern.

You may want to use an irrevocable life insurance trust (ILIT) when life insurance is creating an estate tax problem rather than solving one.

For example, if a large life insurance policy would increase the size of your taxable estate, an ILIT may help keep those proceeds outside of your estate because the trust (not you) owns the policy.

ILITs can also help solve the liquidity problem that some estates face. For instance, if you pass down a family business, properties, or other hard-to-liquidate assets, your heirs may need to sell some of them—even if they don’t want to—to help cover taxes or other settlement costs. However, with an ILIT, they can use life insurance proceeds for these costs without needing to sell family assets.

The trade-off is that ILITs are designed to be permanent. Once you transfer assets into the trust, it can be difficult to make changes.

QTIP trust (marital trust)

• When this trust may make sense: QTIP trusts may make sense if you want to support a surviving spouse while still having control over who will ultimately inherit your assets when they pass.

Roughly two-thirds of people who get divorced go on to get remarried.² Qualified terminable interest property (QTIP) trusts are often used when estate planning goals and family dynamics don’t perfectly align.

For example, if you’re in a second marriage, you may want to provide for your spouse while also ensuring assets eventually pass to your children.

A QTIP trust allows a surviving spouse to receive income from the trust’s assets during their lifetime. After their death, the remaining assets pass to beneficiaries chosen by the original grantor.

At the same time, QTIP trusts qualify for the federal marital deduction, which generally allows estate taxes to be deferred until the surviving spouse’s death.

Special needs trust

• When this trust may make sense: Consider a special needs trust if you want to leave money to a child, sibling, or other loved one with a disability who relies on means-tested government benefits.

More than one in four adults has some type of disability in the U.S.³ A special needs trust may be worth exploring if you're concerned about what will happen when you're no longer around to provide financial support for a loved one with a disability.

A special needs trust can help your loved one get financial support for housing, education, hobbies, medical equipment, care, and other quality-of-life upgrades without interfering with their ability to qualify for government benefits. So if you want to leave money to someone on Medicaid or Supplemental Security Income (SSI), this type of trust could be worth exploring.⁴

Dynasty trust

• When this trust may make sense: Dynasty trusts are generally used by families focused on preserving significant wealth across multiple generations.

Most families don’t need a dynasty trust. But if your goal is to create a lasting family legacy that extends beyond your children and grandchildren, it may be worth exploring.

A dynasty trust is a type of irrevocable trust designed to hold and manage assets for multiple generations. Unlike many trusts that distribute assets within a relatively short time frame, a dynasty trust can remain in place for decades and, in some states, even longer.

Because assets remain in the trust, they can continue benefiting children, grandchildren, and future descendants according to the instructions you put in place.

For affluent families, dynasty trusts may offer two key advantages: They can help reduce the estate taxes that might otherwise apply each time wealth passes from one generation to the next, and they may provide a layer of protection from creditors, lawsuits, or other claims against beneficiaries.

Frequently asked questions