Types of trusts

There are many types of trusts for different needs and different financial situations. Finding the right trust for your estate plan involves careful consideration of the benefits, drawbacks, and rules of each type.

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What are the different types of trusts?

A trust is an estate-planning tool that allows you to transfer assets to your beneficiaries, either during your lifetime or after your death. A trust has many benefits, including helping you avoid probate, reducing estate taxes, protecting your assets from creditors, and ensuring that your last wishes are followed. However, not all trusts are the same. Different types serve various purposes, each with their own advantages and disadvantages. Here, we will go over some of the most common.


Revocable vs. irrevocable trusts

Trusts typically fall into one of two categories: revocable and irrevocable. Most of the types of trusts described below fit into one category or the other. At its most basic, a revocable trust means the person who creates it can change it whenever they want. An irrevocable trust, on the other hand, is much more difficult to change after its initial setup. But irrevocable trusts usually have greater tax advantages. Learn more about revocable vs. irrevocable trusts and their benefits.


Charitable trusts

A charitable trust can help you support a cause you care about while receiving tax benefits and providing income for yourself or your loved ones. There are two main types of charitable trusts. A charitable remainder trust pays you or your beneficiaries a specified income for a defined period, then transfers the remaining assets to the charity. A charitable lead trust is the opposite. It pays the charity first, and what’s left over goes to your beneficiaries.


Special-needs trusts

A special-needs trust funds care for a person with a disability. Its main benefit is its ability to provide financial stability without affecting the beneficiary’s eligibility for government benefits, such as Medicaid and Supplemental Security Income (SSI). A special-needs trust can also protect the assets from potential creditors and predators of the beneficiary. Learn more about financial planning for families dealing with disabilities.


Generation-skipping trusts

A generation-skipping trust is a specialized tool for high-net-worth families that lets you transfer some of your wealth to grandchildren or descendants to avoid paying estate taxes with each generation. However, this type of trust is subject to a special tax called the generation-skipping transfer tax (GSTT).


Grantor retained annuity trusts (GRATs)

With this type of irrevocable trust, you transfer your assets to the trust but can still receive an annuity payment for a set period. The annuity payment is based on the value of the assets and an interest rate set by the IRS. At the end of the term, the remaining assets in the trust are transferred to your beneficiaries. However, a GRAT also involves some risks. If you pass during the term of the trust or the assets do not appreciate as expected, the trust can fail and the assets will be included in your estate calculations.


Life insurance trusts

With a life insurance trust, you transfer an existing or new life insurance policy to the trust and name it as the beneficiary of the policy. This excludes the proceeds of the policy from your taxable estate and can help provide liquidity to pay for other needs, such as funeral costs. Learn more about the importance of irrevocable life insurance trusts.


How do I choose the right trust?

Choosing the right trust for your estate plan depends on your goals, needs, and situation. There is no one-size-fits-all solution. Factors to consider include:

  • The type and value of your assets
  • The number of beneficiaries and their relationship with each other
  • The level of control and access you want to have over your assets
  • The tax implications and costs of the trust
  • The legal and financial risks of the trust
  • The complexity and maintenance of the trust

To find the most suitable choice for you, it’s important to consult with a qualified estate planning professional who can provide guidance. He or she can assist in creating a trust that meets your objectives and complies with relevant laws and regulations, as well as help you update your trust as your circumstances change.


Frequently asked questions

Revocable trusts are more common than irrevocable trusts, but they don’t offer the same tax benefits. Learn about the differences.

This question has no definitive answer. It depends on what you want to do with the asset.

Irrevocable trusts often have more tax advantages, but the answer will change based on your specific set of circumstances.


Create a trust as part of your overall estate-planning strategy.

A tax advisor and attorney can help you create a plan. Our financial professionals can help answer questions, and work with you and those other professionals to help you put financial tools in place for protecting and sharing your wealth.

Neither New York Life Insurance Company (NY, NY), nor its financial professionals, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.