What is a trust and how does it work?
A simple explanation of trusts, how they work, and how they fit into your estate plan.
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Key takeaways
It allows a grantor to specify how and when assets should be distributed to beneficiaries, with a trustee managing the process according to the grantor's wishes.
Trust assets generally don't need to go through probate, which can mean faster access for beneficiaries, greater privacy, and potentially fewer court fees. Trusts can also help with tax planning, asset protection, and maintaining control over how inheritances are used.
A revocable trust can be changed or canceled during your lifetime. An irrevocable trust generally cannot, but it may offer stronger asset protection and tax advantages.
What is a trust?
A trust is a legal document that specifies how and when to transfer your assets to family members, loved ones, or charities. It can hold assets like cash, stocks, bonds, real estate, and income from savings accounts, as well as sentimental items you want to pass along.
Unlike a will, a trust can be managed by you while you're living and by others after your death. Importantly, trust assets generally don't need to go through probate, which allows beneficiaries faster and more private access to their inheritances. While a will may be sufficient for some situations, those with trusts often add a will to cover any property not included in the trust.
How do trusts work?
A trust involves three parties and operates on a fiduciary basis, meaning the person managing the assets has a legal obligation to act in the beneficiary's interest.
Grantor (or trustor): The person who establishes and funds the trust.
Trustee: The person or company responsible for managing and distributing the assets according to the trust's terms. A trustee can be a relative, friend, attorney, or professional trust company.
Beneficiary: The person, group, or organization for whom the trust is established.
How to set up a trust
Setting up a trust generally involves the trustor following four steps:
Consulting an advisor about which type of trust best suits their needs. There are multiple types of trusts available.
Working with an estate planning attorney to draft the trust document based on their wishes. They may also consider coordinating with a tax and financial advisor for a more comprehensive view of their financial situation.
Choosing the right trustee. While this is a personal choice, trustors may consider selecting someone who is reliable, responsible, and has the experience to manage the assets.
Funding the trust. This is generally done by transferring assets into the trust.
What is the difference between a revocable and an irrevocable trust?
A revocable trust, also called a living trust, gives you full control during your lifetime. You can update beneficiaries, change terms, or dissolve the trust entirely. Once you pass away, however, it automatically becomes irrevocable.
An irrevocable trust is set in stone from the start. Once created, you generally can't make changes or take back assets without the approval of beneficiaries. The trade-off is that irrevocable trusts can offer stronger asset protection and may help reduce how much of the estate is taxable.
This is a key distinction in trust planning, as it determines how much flexibility and control you retain. Here’s a quick breakdown of key differences between the two:
Can you change or cancel it? | Yes, at any time during your lifetime | Generally no, not without beneficiary approval |
Who controls the assets? | The grantor retains full control | The grantor gives up control once the trust is funded |
Probate avoidance | Yes | Yes |
Asset protection from creditors | Limited, since the grantor still controls the assets | Stronger, since assets are no longer considered the grantor's property |
Estate tax benefits | Limited, assets are typically still included in the taxable estate | May reduce the taxable estate, since assets are removed from the grantor's ownership |
What happens at death? | Becomes irrevocable; terms are locked in | Terms remain as established |
What are the different types of trusts?
Beyond the revocable and irrevocable distinction, trusts can be structured for a wide range of purposes. Here's a summary of the most common types:
Marital trust | Designed to pass assets to a surviving spouse while potentially minimizing estate taxes |
Testamentary trust | Established through a will after the grantor's death; the trustee distributes assets according to the will's terms |
Charitable trust | Directs assets to a charity (charitable remainder) or splits benefits between charitable and noncharitable beneficiaries (charitable lead) |
Spendthrift trust | Restricts when and how assets are distributed to protect a beneficiary who may not manage money responsibly |
Special needs trust | Provides financial support for a loved one with a disability without affecting their eligibility for government benefits |
Education trust | Earmarks assets specifically for educational expenses |
Life insurance trust | Holds life insurance proceeds outside the taxable estate, potentially reducing estate taxes and providing liquidity to beneficiaries |
Grantor retained annuity trust (GRAT) | Allows the grantor to transfer appreciating assets to the next generation with minimized gift tax while receiving annuity payments for a set period |
Business trust | Holds business interests to support estate planning and succession |
The right type of trust depends on your goals, your family situation, and the complexity of your assets. An estate planning attorney can help you determine which structure fits your needs.
What is the main purpose of a trust?
The main purpose of a trust is to ensure assets are protected and distributed according to one’s wishes. Although setting up a trust can be more involved than creating a will, trusts offer several key advantages:
Control and flexibility. You specify exactly when and how assets are distributed. A revocable trust keeps assets accessible during your lifetime while locking in your wishes after death.
Probate avoidance. Trust assets bypass probate, which is a public process that can be slow and costly. This can save beneficiaries time, court fees, and maintain privacy.
Asset protection. Irrevocable trusts can help shield assets from creditors, lawsuits, and beneficiaries who may not be experienced with money management.
Tax planning. For larger estates, trusts can help minimize estate, gift, and income taxes. For context, the 2026 federal estate and gift tax exemption is $15 million per individual ($30 million for married couples), and the annual gift tax exclusion is $19,000 per recipient. Estates below those thresholds generally won't owe federal estate tax, though state-level estate or inheritance taxes may still apply at lower thresholds.
Reduced conflict. Unlike wills, trusts aren’t easily contested in court, which can minimize disputes between beneficiaries.
"There isn't a universal income or asset threshold where a trust suddenly becomes necessary," Jonathan Soobin Kim, CFO, US, at Raisin explained. "In many cases, the decision has less to do with net worth and more to do with complexity. Factors such as owning real estate in multiple states, having minor children, operating a business, or wanting greater control over how assets are transferred can all make a trust worth considering."
When should you consider setting up a trust?
You don't need to be wealthy to benefit from a trust. While trusts are often associated with large estates and tax planning, they serve practical purposes at many wealth levels.
A trust may be worth considering if you:
Own property in more than one state (a trust can help avoid probate in multiple jurisdictions)
Have minor children and want to specify how and when they receive assets
Want to provide for a family member with a disability without affecting their government benefits
Run a business and want to plan for succession
Want to keep the details of your estate private (probate is a public record)
Want to ensure assets are distributed according to your wishes rather than state intestacy laws
Kim notes that timing matters more than most people expect.
"One of the most common 'I wish I'd done this sooner' moments comes after someone helps a family member navigate a major life transition,” he said. “That's often when people realize that trust planning isn't just for the ultra-wealthy."
Bottom line
A trust is one of the most flexible tools available for managing how your assets are protected, managed, and passed on. Whether your priority is avoiding probate, protecting a beneficiary, reducing taxes, or simply maintaining control over your wishes, the right trust structure can help.
The key is to start the conversation early, ideally with an estate planning attorney who can assess your situation and recommend the structure that fits your goals. For an overview of broader planning considerations, our estate planning guide covers additional steps worth considering.
If you're building savings that you plan to pass along to loved ones, a high-yield savings account or CD can help those funds grow in the meantime. With Raisin, you can compare, fund, and manage competitive savings products across multiple federally insured banks and credit unions all from a single login.
Frequently asked questions (FAQs) about trusts
What is the difference between a trust and a will?
Both trusts and wills are legal documents that specify how your assets should be distributed, but they work differently. A will only takes effect after your death and must go through probate, which is a public court process. A trust can take effect during your lifetime, avoids probate, and keeps the details of your estate private. Many people use both: a trust for their primary assets and a will to cover anything not included in the trust.
Do I need a trust if my estate is below the federal exemption?
The federal estate and gift tax exemption is $15 million per individual in 2026, so most estates won't owe federal estate tax. However, trusts serve purposes beyond tax planning. Probate avoidance, asset protection, privacy, and control over distributions are all reasons to consider a trust regardless of your estate's size. State-level estate or inheritance taxes may also apply at lower thresholds.
How much does it cost to set up a trust?
Costs vary depending on the complexity of the trust, the attorney, and your location. A basic revocable living trust typically costs between $1,000 and $3,000 to establish with an attorney. More complex trusts, such as irrevocable trusts or those involving business interests, can cost more. While a trust is more expensive to set up than a will, it can save beneficiaries time and money by avoiding probate.
Can I be my own trustee?
Yes. With a revocable trust, you can serve as your own trustee and maintain full control of the assets during your lifetime. Most people who create revocable trusts also name a successor trustee to take over if they become incapacitated or after their death. For irrevocable trusts, the grantor typically cannot serve as trustee since the purpose is to remove the assets from their control.
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