A Guide to the Different Types of Trusts

With an estate plan, you can ensure that your assets will be managed according to your wishes, both during your lifetime and after you pass away. Wills are the centerpiece of many estate plans, but they can be contested and may require a lengthy probate process. That is why many people rely on a trust to transfer assets to their loved ones. However, there are many types of trusts, each serving a different purpose or financial situation.

If you need help arranging your estate, managing your accounts and planning ahead for taxes, a financial advisor can help.

What Is a Trust?

Often, the trustor will also serve as the trustee, or as one of several trustees, until their death.

Similar to a will, a trust can have beneficiaries. Those beneficiaries may be your spouse, children, other family members or even close friends. You can also name a charitable organization as a trust beneficiary.

Trust beneficiaries receive assets based on the trustee’s instructions. You set these instructions as the trust’s settlor.

There are several types of assets you may transfer to a trust.

• Real property, including homes, land or investment real estate
• Deposit accounts held at banks and credit unions
• Investments, including stocks, bonds and money market accounts
• Life insurance policies
• Business interests and assets
• Collectibles and antiques

Funding a trust occurs when you transfer assets into the trust, thereby placing them under the trustee’s control.

Advantages of Trusts for Estate Planning

Essentially, trusts let you control how and when your assets pass on. They have several benefits for creators and beneficiaries alike.

You may consider a trust if you want to:

• Pass on assets while avoiding probate
• Create a plan for managing personal or business assets in case of incapacitation
• Set aside assets to care for a dependent with a disability
• Establish rules or requirements that beneficiaries must meet to receive their inheritance
• Preserve assets for the care of minor children if you pass away
• Potentially reduce estate taxes and gift taxes

“A trust can be a critical part of any estate plan, especially if you have small children,” says Paul T. Joseph, attorney, certified public accountant (CPA) and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan.

He adds that they’re also helpful if you have older children who are “not capable of handling and managing the assets contained in the trust.” The stipulations you outline in the trust can help your beneficiaries use it wisely.

Revocable vs. Irrevocable Trusts

Before diving into specific types of trusts, it helps to understand the two broad categories of trusts: revocable and irrevocable trusts. You can modify the former after it’s established, while the latter cannot. 

Here’s how each works.

Revocable Trusts

Revocable trusts, also referred to as revocable living trusts, allow you to maintain control of your assets during your lifetime. You can change or dissolve a revocable trust if necessary. For example, if you go through a divorce or acquire new assets, you may need to update the terms of the trust to reflect the consequences of those events.

A revocable trust offers flexibility, since the transfer of assets and their guidelines don’t become permanent until you pass away. You have the option to name yourself the trustee or co-trustee. You can then choose someone to act as a successor trustee when you die or if you’re otherwise unable to manage the trust.

Revocable trusts aren’t subject to probate. That means trust assets go to beneficiaries without the requirement of probate court. This allows for greater privacy than a will.

Irrevocable Trusts

Once you establish an irrevocable trust, you cannot change or modify it. If you transfer real estate or other assets you own to the trust, you can’t undo that action.

While less flexible, a trust can be beneficial as a safeguard. “An irrevocable trust would typically be used to create a safe haven for the placement of assets,” Joseph says. “These trusts may protect assets from claims of creditors, beneficiaries or even Medicaid.”

Additionally, an irrevocable trust can remove certain assets from your estate, sheltering them from estate and gift tax. This may be appealing if you have a large estate and need a way to minimize tax liability on those assets. 

10 Special Types of Trusts

Beyond those two broad categories, there are a number of different specialty trusts you can incorporate into your estate plan.

1. Marital Trusts

A marital trust (or an A trust) can be established by one spouse for the benefit of the other.

When the first spouse passes away, the trust assets, along with any income they generate, pass to the surviving spouse. A marital trust allows the surviving spouse to avoid paying estate taxes on those assets during their lifetime.

The surviving spouse’s heirs, however, will be responsible for paying estate taxes on any remaining trust assets that eventually go to them.

2. Bypass Trusts

Married couples may also establish a bypass or credit shelter trust, also known as an AB trust. This helps reduce the estate tax impact on their heirs.

When the first spouse dies, this type of trust splits assets into two separate trusts. One trust receives as many assets as the state or federal estate tax exemption limit allows. The remainder may move to a marital trust for the surviving spouse.

When the surviving spouse dies, any remaining assets pass to their beneficiaries free of estate tax.

3. Charitable Trusts

A charitable trust helps you create a legacy of giving within your estate plan.

There are two types of charitable trusts you can establish.

• Charitable lead trust. A charitable lead trust directs some assets to charity. The remaining assets go to your beneficiaries after you pass away.
• Charitable remainder trust. A charitable remainder trust allows you to receive income from your assets for a set period. Any remaining assets or income will go to a charity that you designate.

4. Generation-Skipping Trusts

If you’d rather transfer assets to your grandchildren than your children, you can choose a generation-skipping trust.

This type of trust lets you pass assets to your grandchildren, helping your children avoid estate taxes on those assets. At the same time, you can still allow your children access to any income the assets generate.

5. Grantor Retained Annuity Trust (GRAT)

A grantor retained annuity trust (GRAT) runs for a limited period. It serves as a strategic way to reduce taxes on financial gifts to beneficiaries.

With this trust, you contribute the assets that you want to gift. You then receive a regular annuity payment, based on the original value of the assets. At the end of the term, the remaining funds will transfer to your beneficiaries without any gift tax obligation. 

This type of trust can be a good way to receive payments now for income while leaving part of your assets to your loved ones.

6.  Life Insurance Trusts

A life insurance trust is an irrevocable trust that you designate specifically to hold life insurance proceeds.

You designate the trust as the beneficiary of your life insurance policy. Upon your death, the policy proceeds are paid to the trust. The trustee then manages the proceeds on behalf of your beneficiaries.

The advantage of an irrevocable life insurance trust is that it allows you to avoid estate taxes on life insurance payouts.

7. Special Needs Trusts

A special needs trust can help provide for a special needs dependent, such as a child, sibling or parent.

It does this without compromising their eligibility for government disability benefits. The money in the trust allows them to pay for medical care and day-to-day needs while remaining eligible for government benefits.

8. Spendthrift Trusts

A spendthrift trust may give you peace of mind if you’re concerned about your heirs frittering away their inheritance. This type of trust allows you to specify when and how trust beneficiaries can access principal trust assets.

The purpose of this is to prevent misuse. For instance, you may restrict beneficiaries to receiving only the income or interest earned by trust assets, not the principal amount of the assets.

9. Testamentary Trusts

A testamentary trust, or will trust, is established through a last will and testament. Once you pass away, the executor activates the trust, making it irrevocable.

The main function is to ensure that beneficiaries can only access trust assets at a predetermined time. People often use testamentary trusts to specify when they leave their assets to their beneficiaries. For example, if you’re a parent, you might have assets you don’t want to leave to a child until they turn 18 or graduate from college.

Once the beneficiary receives the specified assets, the trust terminates.

10. Totten Trusts

A Totten trust, also known as a payable-on-death account, lets you put money into a bank account or other security. When you die, the money that you’ve set aside passes to the named beneficiary of the account.

Otherwise, a Totten trust functions similarly to a standard bank account. You can deposit and withdraw funds, or even close the account, at any time. You can also name a new beneficiary if you so choose.

The key thing to keep in mind with a Totten trust is that you name a beneficiary, and when you die, the beneficiary receives the money in the account.

How Trusts Are Taxed

Tax treatment is one of the most important factors in choosing a trust, and it varies significantly depending on the type of trust you establish.

Revocable Trusts

While the grantor is alive, a revocable trust is not a separate entity for tax purposes. The grantor reports all income, gains and deductions on their personal tax return using their Social Security number.

From a tax standpoint, owning assets in a revocable trust is no different from owning them in your own name. This changes when the grantor passes away. At that point, the trust typically becomes irrevocable and may need its own tax identification number and annual tax filing.

Irrevocable Trusts

An irrevocable trust is a separate legal entity. It requires its own Employer Identification Number (EIN) and must file a federal tax return using IRS Form 1041 each year.

How the income is taxed depends on whether the trust keeps it or distributes it.

• Income the trust retains is taxed at the trust level.
• Income it distributes to beneficiaries is reported on the beneficiaries’ personal returns and taxed at their individual rates.

Why the Trust Tax Brackets Matter

Trusts reach the highest federal income tax brackets far faster than individuals.

For 2026, a trust hits the top tax rate of 37% ¹ at just $16,000 in taxable income. ² By comparison, a single individual doesn’t reach that same rate until their income exceeds $640,600.

This compressed bracket structure means income that stays inside an irrevocable trust faces much more aggressive taxation than income passing through to beneficiaries. It’s one of the main reasons trustees often distribute income rather than letting it accumulate in the trust.

2026 Tax Rates for Trusts

Capital Gains

Trusts pay the same preferential tax rates on long-term capital gains and qualified dividends as individuals. This is 0%, 15% or 20%. However, the income thresholds are much lower.

For 2026, a trust reaches the 20% long-term capital gains rate at just $16,250 in income, compared to $545,500 for a single filer. Short-term capital gains are subject to ordinary income taxes using the compressed trust brackets above.

Net Investment Income Tax

Trusts with undistributed investment income above $16,000 also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of their regular rates. ³ This can push the effective top rate on ordinary trust income to 40.8% and on long-term capital gains to 23.8%.

The NIIT applies to interest, dividends, capital gains, rental income and income from passive business activities. Because the threshold is so low for trusts, even modest investment income can trigger this additional tax.

Estate and Gift Tax Implications

Transferring assets into an irrevocable trust is generally treated as a taxable gift. The federal annual gift tax exclusion allows you to give up to $19,000 per recipient in 2026 without triggering gift tax.

Beyond that, transfers count against your lifetime estate and gift tax exemption, which is $15 million per person in 2026 ⁴ . They have different tax treatment depending on the type of trust.

• Assets in an irrevocable trust do not count toward your taxable estate. This can potentially reduce or eliminate estate tax exposure for larger estates.
• Assets in a revocable trust remain part of your taxable estate because you retain ownership and control during your lifetime.

How This Connects to the Trust Types Above

Understanding the tax treatment of each structure is just as important as understanding how it functions because the tax impact directly affects how much wealth actually reaches your beneficiaries.

How to Select the Right Type of Trust

Once you understand the main trust types, the next step is matching the right structure to your goals.

• Some people prioritize avoiding probate and keeping their affairs private, which makes a revocable living trust a straightforward choice.
• Others want creditor protection or a way to remove assets from their taxable estate, which pushes them toward irrevocable structures.
• Families supporting a child with disabilities often need a trust that preserves eligibility for public benefits.
• High-net-worth households may focus on tools that manage estate taxes or transfer business interests efficiently.

Your choice may also depend on timing and control. If you want to keep managing assets during your lifetime and make changes as life unfolds, a revocable trust lets you do so. If your priority is asset protection or long-term tax planning, committing property to an irrevocable trust may be more effective. For parents, the decision often depends on how strict they want distribution rules to be and when beneficiaries should receive assets.

Trusts also differ in how they handle liquidity, investment management and administrative work. Some are straightforward to maintain; others require ongoing filings, fiduciary accounting or professional trustees. Understanding these practical demands can help you avoid choosing a structure that is wrong for your family.

Talking through these tradeoffs with an estate attorney or financial advisor can help you choose a trust that matches your goals and assets, as well as the level of oversight you want to maintain.

Bottom Line

A well-crafted estate plan will protect the interests of both you and your beneficiaries. While a will is an essential part of the estate-planning process, a trust can ensure that your assets pass to your loved ones without probate. However, before creating a trust, consider the different types available. This decision will be vital to how well your estate plan holds up over time.

Tips for Estate Planning

• If you’re unsure whether a trust belongs in your estate plan, you don’t have to go it alone. Most financial advisors have the resources to help you put together an estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
• Estate taxes can be hefty, but you can maximize inheritance for your family by gifting portions of your estate in advance to heirs, or even setting up a trust. Some inherited assets can also have tax implications, so read more about inheritance taxes and exemptions now.

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