The different types of trusts most people encounter are six: revocable living trusts, irrevocable trusts, testamentary trusts, spendthrift trusts, special needs trusts, and charitable trusts. Each solves a different problem. Some keep assets out of probate, some pull them out of your taxable estate, some shield a beneficiary from creditors or protect a disabled family member’s government benefits, and some direct money to a cause. Which one fits depends on what you are trying to accomplish — flexibility, tax savings, asset protection, or long-term support for a specific person or purpose.
Revocable Living Trust
A revocable living trust is created and funded during your lifetime, and you can change or cancel it at any time. Under the Uniform Trust Code, which a majority of states have adopted in some form, a trust is presumed revocable unless its terms expressly say otherwise.1Uniform Law Commission. Trust Code You keep full control. You can add or remove assets, swap beneficiaries, or dissolve the trust entirely.
Most grantors name themselves as the initial trustee, so day-to-day management stays in their own hands, and name a successor trustee to step in on incapacity or death. Because you retain the power to pull assets back at any time, the IRS treats a revocable living trust as a grantor trust: the trust is ignored for income tax purposes, and income, deductions, and credits flow through to your personal Form 1040.2Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers No separate tax return or EIN is needed while you are alive and serving as trustee.
The main reason people set one up is to avoid probate. That benefit only applies to assets you actually retitle into the trust’s name. Real estate requires a new recorded deed. Bank and brokerage accounts require updated ownership records. Anything you forget stays in your personal name and may have to go through probate. A pour-over will acts as a safety net: it directs that any property still titled in your name at death pours into the trust. The catch is that those leftover assets must pass through probate first before reaching the trust.
Irrevocable Trust
An irrevocable trust is a separate legal entity, and once you sign and fund it you generally cannot change or cancel it. When you move property into one, you give up ownership. The assets belong to the trust, not to you. That loss of control is precisely what makes the structure useful.
Estate Tax
Because the assets no longer belong to you, they are removed from your taxable estate. The federal estate tax applies only to estates valued above $15 million for individuals who die in 2026.3Internal Revenue Service. What’s New – Estate and Gift Tax If your estate is near or above that threshold, moving property into an irrevocable trust while you are alive can reduce or eliminate the estate tax your heirs would otherwise face.
Changing an Irrevocable Trust
“Irrevocable” does not mean untouchable. Under the Uniform Trust Code, a noncharitable irrevocable trust can be modified or terminated if the grantor and all beneficiaries agree. If the grantor is gone or some beneficiaries do not consent, a court may still approve the change when nonconsenting beneficiaries’ interests are adequately protected. A court can also modify the trust when unforeseen circumstances make the original terms impractical.
Taxes
Unlike a revocable trust, an irrevocable trust that is not a grantor trust is its own taxpayer. The trustee must get an EIN and file Form 1041 for any year the trust earns $600 or more in gross income.4Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1 Trust brackets are heavily compressed: in 2026, the top 37 percent rate kicks in once taxable income exceeds just $16,000.5Internal Revenue Service. 2026 Form 1041-ES Income retained inside the trust reaches the top rate far faster than it would on an individual return, which is why many trustees distribute income out to beneficiaries at their lower personal rates.
Medicaid Planning
Some people use irrevocable trusts to move assets out of their name to qualify for Medicaid long-term care coverage. Medicaid reviews every transfer made during the 60 months before application, the look-back period. A transfer into an irrevocable trust inside that window is treated as a gift and triggers a penalty period of ineligibility, calculated by dividing the value transferred by the average monthly cost of nursing home care in your state. Planning this at least five years before you expect to need benefits is essential.
Testamentary Trust
A testamentary trust does not exist during your lifetime. The instructions to create it live inside your will, and the trust itself comes into being only after you die and the will passes through probate. That makes it fundamentally different from a living trust, which is active the moment you fund it.
After death, the probate court validates the will and the executor pays outstanding debts. Once those obligations are met, the court oversees the transfer of remaining assets into the newly created trust. The trustee then manages and distributes the property on whatever schedule you specified — such as staggered distributions to children as they reach set ages.
The main drawback is privacy. The will, including all the trust’s terms, becomes a public court record during probate. Anyone can read it: beneficiary names, the assets, the distribution plan. Creditors also get a window to file claims against the estate before assets move into the trust. A revocable living trust avoids probate entirely for assets properly funded into it and keeps the details private.
Spendthrift Trust
A spendthrift trust contains a clause that prevents beneficiaries from pledging, selling, or otherwise transferring their right to future distributions. The same clause blocks most outside creditors. If a beneficiary owes a credit card company or loses a lawsuit, the creditor generally cannot reach trust assets before the trustee distributes them, because the trustee controls the timing and amount and the beneficiary never has a lump-sum right that a creditor could seize.
Spendthrift protection is not absolute. Under the Uniform Trust Code and the laws of most states, some creditors can reach trust assets even when a spendthrift clause is in place:
- A beneficiary’s child or former spouse with a court order for child support or maintenance can typically reach both income and principal.
- Federal and state tax authorities can enforce tax liens against the beneficiary’s interest.
- Someone who provided legal or other services to protect the beneficiary’s trust interest may collect from it.
The exceptions reflect a policy that a trust should not let someone escape basic legal obligations like supporting their children or paying taxes.
Special Needs Trust
A special needs trust holds assets for a person with a disability without disqualifying them from means-tested government benefits such as Medicaid and Supplemental Security Income. Those programs cap countable resources at $2,000 for an individual.6Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Because the trust owns the assets, not the beneficiary, the money does not count against that limit. Trust funds can cover what government programs do not: specialized medical equipment, private therapy, education, personal care items. The trustee pays vendors directly; cash in the beneficiary’s hands would count as a resource.
There are three common structures, and the differences matter.
First-Party
A first-party special needs trust is funded with the disabled person’s own money, such as a personal injury settlement or an outright inheritance. Federal law requires the beneficiary to be under age 65 when the trust is created, and the trust must be established by a parent, grandparent, legal guardian, or a court.7Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets The tradeoff is a Medicaid payback requirement: when the beneficiary dies, anything left in the trust must first reimburse the state for Medicaid benefits paid on the beneficiary’s behalf.8Social Security Administration. Exceptions to Counting Trusts Established on or after January 1, 2000 The state is first in line, ahead of other debts and administrative expenses.
Third-Party
A third-party special needs trust is funded by someone other than the beneficiary, typically a parent or grandparent using their own money, life insurance proceeds, or an inheritance. Because the assets never belonged to the disabled person, there is no Medicaid payback at death. Whatever remains can pass to other family members. This is the structure most families use when planning ahead for a loved one with a disability.
Pooled Trusts
A pooled trust is managed by a nonprofit that keeps a separate account for each beneficiary while pooling the funds for investment. Pooled trusts have no age restriction, so someone over 65 can join one.7Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets On the beneficiary’s death, remaining funds not retained by the nonprofit must reimburse the state for Medicaid costs. Many pooled trusts are structured so leftover funds stay with the nonprofit to benefit other disabled beneficiaries rather than reverting to the state.
Charitable Trust
A charitable trust is created to benefit the public or a specific nonprofit. To qualify, it must serve a recognized charitable purpose such as relieving poverty, advancing education or religion, or promoting health. Unlike private trusts, a charitable trust can last indefinitely. There are two basic shapes, and they run in opposite directions.
Charitable Remainder Trust
A charitable remainder trust pays income to you or another noncharitable beneficiary for a set period, either up to 20 years or for the beneficiary’s lifetime. Whatever remains at the end goes to the charity. Federal law requires that the annual payout be at least 5 percent and no more than 50 percent of the trust’s value, and the projected remainder to charity must be worth at least 10 percent of the initial contribution.9Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts The trust itself is generally exempt from income tax, and you get an income tax deduction in the year you fund it: up to 60 percent of adjusted gross income for cash contributions, 30 percent for appreciated property. Any unused deduction carries forward for up to five additional years.
Charitable Lead Trust
A charitable lead trust runs in reverse. The charity receives income for a specified period, and when that period ends, the remaining assets pass to your noncharitable beneficiaries, often children or grandchildren. The structure can significantly reduce gift and estate tax on the transferred property, because the taxable value of the gift to your heirs is reduced by the value of the charity’s income interest.
The state attorney general oversees charitable trusts. If the original purpose becomes impossible or impractical, a court may apply the doctrine of cy pres and redirect the funds to a purpose as close as possible to the grantor’s original wishes.
What the Trustee Owes the Beneficiaries
Whichever structure you pick, the trustee is held to a fiduciary standard: a legal duty to act in the beneficiaries’ best interest, not their own. The Uniform Prudent Investor Act, adopted in some form by nearly every state, requires trustees to evaluate investments as part of the overall portfolio rather than judging each asset in isolation, and to weigh factors like beneficiaries’ needs, inflation, taxes, and the balance between current income and long-term growth. The Act also requires diversification. A trustee who concentrates trust assets in a single stock or asset class without a good reason can be held personally liable for the losses.
Professional or corporate trustees typically charge an annual fee based on a percentage of trust assets, often somewhere between 0.5 percent and 2 percent depending on size and complexity. A family member serving as trustee can usually be reimbursed for reasonable expenses, and may receive compensation if the trust document allows it.