Trusts Explained: Types Every Financial Advisor Should Know

The trust conversation rarely fails because clients do not understand trusts. It fails because advisors frame the discussion backward. Clients walk in thinking they need a trust to “avoid probate” or “save taxes,” conclusions shaped by estate planning marketing rather than their actual situation. The real conversation starts elsewhere: with control during lifetime incapacity, with seamless transition at death, with privacy that probate cannot offer, and with flexibility that a will cannot match. Until you reframe what a trust actually does for a particular client, the instrument remains abstract. Once you clarify the problem the trust solves, the question shifts from “Do I need one?” to “Which structure makes sense for me?”

The gap between need and adoption tells a sobering story. Only 11% of Americans have a trust, according to the 2025 Trust & Will Estate Planning Report (10,000 respondents). Meanwhile, 55% have no estate plan at all. Among high-net-worth households with more than $5 million in assets, trust usage exceeds 80%. Trusts are not a mass product. They are a targeted tool for clients facing specific challenges. Your job as an advisor is to identify which clients face those challenges and to understand which trust architecture addresses them.

The Trust Framework: Three Roles, One Purpose

A trust begins with a simple legal principle: one person can hold and manage assets on behalf of another. The grantor creates the trust and funds it with assets. The trustee manages those assets according to the grantor’s written instructions. The beneficiary receives income, principal, or both as the trust document specifies. These three roles can overlap. The grantor often serves as initial trustee of their own revocable trust. The beneficiary can be the grantor during their lifetime. The trustee can be a spouse, an adult child, a professional fiduciary, or a bank trust department.

The purpose of any trust structure is to direct how assets flow: to whom, under what conditions, and with who deciding. That direction function survives the grantor’s incapacity and death. A will does the same thing, but only after probate. A trust operates immediately upon funding and continues through death and beyond without court involvement. A will is a public document once filed with the probate court. A trust remains private. These functional differences explain why trusts cost more to establish (typically $1,500 to $3,000 for simple estates, rising to $5,000 or more for complex situations) than simple wills, yet still represent value for clients whose circumstances demand those functions.

The structure also creates a separation of legal and beneficial ownership. The trustee holds title to trust assets; the beneficiary holds the right to distributions. This separation allows the grantor to protect assets from a beneficiary’s creditors, direct distributions to someone who lacks capacity to manage assets independently, and manage property after death through a chosen trustee’s hands. For a grantor with substantial wealth, minor children, blended family concerns, or a beneficiary with special needs, that separation becomes the foundation of the plan.

Revocable vs. Irrevocable: The Control Question

Every trust decision comes down to a single trade-off: how much control is the grantor willing to surrender now in exchange for benefits later?

A revocable trust surrenders nothing during the grantor’s lifetime. The grantor can change the terms, withdraw assets, or terminate the trust entirely. The grantor typically serves as trustee and retains complete control. This flexibility carries a cost: a revocable trust provides no income tax benefits, no gift tax advantages, and no creditor protection. The IRS treats the trust as invisible because the grantor retains sufficient control. Trust income is reported on the grantor’s personal tax return. At death, the trust’s assets enter the grantor’s taxable estate at full value.

An irrevocable trust works differently. Once funded, the grantor cannot change or terminate it without the beneficiary’s consent (or, in some cases, court approval). The grantor surrenders control but gains real benefits. An irrevocable trust is a separate tax entity with its own identification number and tax return. More importantly, assets placed in an irrevocable trust can be removed from the grantor’s taxable estate and placed beyond the reach of the grantor’s creditors. For clients with estates above federal or state exemption levels, that removal can mean the difference between a taxable and a non-taxable estate.

This trade-off creates real tension in client conversations. A 68-year-old with $4 million in liquid assets and a $2 million life insurance policy faces the choice directly: maintain a revocable trust for simplicity, or move the policy into an irrevocable life insurance trust and accept that the policy enters a structure the grantor cannot later reclaim. The advisor’s framing matters here. The client is not losing control over their $4 million estate. They are moving control of a death benefit (one they will never personally spend) into a structure that keeps more of it reaching their children. That distinction helps clients accept irrevocable structures when the circumstances warrant them.

Modern trust law has softened the irrevocable line somewhat. Trust decanting, now available in a majority of states, allows a trustee to transfer assets from one irrevocable trust into a new trust with updated terms. Courts can also modify irrevocable trusts when circumstances change in ways the grantor could not have anticipated. “Irrevocable” no longer means “unchangeable in all circumstances,” though these remedies require attorney involvement and carry limitations.

Trust Types Every Advisor Encounters

Understanding when each trust structure solves a client problem is where trust expertise actually lives. Knowing definitions is baseline. Knowing when a revocable living trust prevents family conflict, when a QTIP trust addresses a second marriage, or when a special needs trust protects a disabled beneficiary is what your clients count on.

The Revocable Living Trust

The revocable living trust is the most common trust advisors recommend. The grantor creates it during life, funds it with primary assets (the home, investment accounts, liquid savings), and serves as trustee. If the grantor becomes incapacitated, the successor trustee steps in without requiring court guardianship. At death, the successor trustee distributes assets according to the trust terms without probate.

The revocable trust solves three problems directly: it avoids probate, it provides seamless management during incapacity, and it keeps estate details private. It does not reduce taxes, does not protect assets from creditors, and does not shield assets from the grantor’s spouse in a community property state. For most clients above $500,000 in net worth with family concerns or out-of-state property, a revocable living trust is the planning foundation.

Credit Shelter Trust (AB Trust)

The credit shelter trust splits a married couple’s estate into two trusts at the first death: the survivor’s trust (Trust A) and the bypass trust (Trust B). Assets up to the deceased spouse’s federal exemption amount go into Trust B. The surviving spouse can receive income from Trust B but cannot control who receives the principal at the surviving spouse’s death. The remaining assets pass to Trust A, which the surviving spouse controls fully.

Before the One Big Beautiful Bill Act (signed July 4, 2025), AB trusts were a standard recommendation for married couples with estates above $5 million because each spouse’s exemption could be lost if unused at the first death. Portability, introduced in 2011, made this less urgent at the federal level but did not apply to state estate taxes or the generation-skipping transfer (GST) tax exemption.

With OBBBA making the federal exemption permanent at $15 million per person ($30 million for married couples) starting January 1, 2026, AB trusts have become a specialized tool rather than a default recommendation. Most couples no longer need to “capture” the first spouse’s exemption through a trust structure. AB trusts remain relevant for families with estates above the combined $30 million threshold, for clients in the 12 states (plus DC) that impose their own estate taxes at lower exemptions, and for situations where the growth of Trust B assets outside the surviving spouse’s estate produces substantial long-term savings.

The QTIP Trust

A Qualified Terminable Interest Property (QTIP) trust serves second marriages and blended families. The surviving spouse receives all income from the trust for life but cannot control who receives the principal at their death. The first spouse’s trust document determines the ultimate beneficiaries.

Consider the scenario advisors encounter regularly: William, age 72, married to his second wife Margaret for 15 years. William has two children from his first marriage. He wants Margaret to live comfortably if he dies first, but he also wants to ensure his children ultimately receive his assets. A QTIP trust gives Margaret lifetime income while guaranteeing William’s children receive the principal after Margaret’s death.

Without the QTIP, William faces an uncomfortable choice: leave everything to Margaret and hope she preserves it for his children, or leave assets directly to his children and risk leaving Margaret underprotected. The QTIP eliminates this tension, though it creates administrative complexity (a separate tax return each year, trustee management, and the potential for friction between the surviving spouse and remainder beneficiaries). For blended families with substantial assets, that complexity is worth accepting.

The Irrevocable Life Insurance Trust (ILIT)

Life insurance death benefits escape income tax but not estate tax. A client who owns a $3 million policy at death adds that entire death benefit to their taxable estate. An ILIT removes the policy from the estate entirely by having the trust, not the insured, own the policy.

The mechanics require care. If the insured transfers an existing policy to an ILIT and dies within three years, the IRS pulls the full death benefit back into the estate (the three-year rule). The safer approach is for the ILIT to purchase a new policy from inception, so the insured never owns it. Funding ILIT premiums involves annual gifts to the trust, which qualify for the annual gift tax exclusion through Crummey withdrawal powers: beneficiaries receive notice of the right to withdraw their share of each contribution for a limited window (typically 30 to 60 days), preserving the gift’s present-interest character without the beneficiaries actually taking the money.

An ILIT makes sense for a client with substantial life insurance and an estate approaching or exceeding exemption levels. For a client with $300,000 in coverage and a $1 million estate, the structure adds complexity without corresponding benefit.

Special Needs Trusts

A special needs trust holds assets for a beneficiary with a disability without disqualifying them from government benefits like Supplemental Security Income (SSI) or Medicaid. Without the trust, a direct inheritance could push a disabled beneficiary’s countable assets above the eligibility threshold (often as low as $2,000 for SSI), eliminating benefits they depend on for housing and medical care.

Third-party special needs trusts, funded by parents or grandparents, carry no payback requirement: when the beneficiary dies, remaining assets pass to whoever the grantor designated. First-party trusts, funded with the disabled person’s own assets (such as a personal injury settlement), require Medicaid reimbursement at the beneficiary’s death before remaining assets pass to others.

For any client with a disabled child or grandchild, a special needs trust is not optional. It is essential. Review every estate document for language that could direct assets to a disabled beneficiary outright, because even a well-drafted plan can create problems if a client’s will leaves “equal shares to my children” and one child later becomes disabled.

Charitable Trusts

A charitable remainder trust (CRT) allows a grantor to transfer appreciated assets to a trust, receive income for life (or a term of years), and pass the remaining principal to charity. The grantor receives an immediate income tax deduction for the present value of the charity’s future interest. A grantor with $1 million in highly appreciated stock can contribute it to a CRT, avoid immediate capital gains tax (the trust sells the stock tax-free), and receive annual income distributions. The trade-off: the principal goes to charity, not to heirs. A charitable lead trust (CLT) inverts this: charity receives income first, and the remainder passes to family members at reduced transfer tax cost. Both structures require substantial assets and a genuine charitable commitment.

The Funding Problem Nobody Talks About

A trust that owns nothing accomplishes nothing. This is the single most common estate planning failure, and it happens with alarming frequency. Research suggests that nearly half of clients who establish trusts never fully fund them. They pay an attorney to draft a revocable living trust, sign the documents, and file them in a drawer. They never retitle their house, their investment accounts, or their bank accounts into the trust’s name. At death, those assets go through probate exactly as if the trust did not exist.

The reasons are understandable. Retitling a house requires a new deed. Transferring a brokerage account means new paperwork at the custodian. Some clients fear losing control (they do not realize that as trustee of their own revocable trust, they control everything exactly as before). Some simply procrastinate.

This is where advisors add immediate, tangible value. You identify which assets need to be in the trust. You coordinate with the client’s attorney. You follow up to ensure the retitling actually happens. You also review beneficiary designations on retirement accounts and life insurance, because those assets pass by beneficiary designation regardless of what the trust says. If the trust is designed to distribute equally to three children, but the IRA beneficiary form names only one child, the plan is broken. Coordinating these moving parts is the work that makes the difference between a plan that functions at death and one that fails.

Trust Planning After the $15 Million Exemption

The One Big Beautiful Bill Act changed the estate tax landscape in a way that many advisors are still absorbing. Before OBBBA, the approaching exemption sunset created pressure to plan aggressively. AB trusts and irrevocable structures were recommended broadly as tax mitigation tools.

With the exemption now permanent at $15 million per person ($30 million for married couples, with inflation indexing starting in 2027), the calculus has shifted. Clients under those thresholds face no federal estate tax exposure unless Congress changes the law. For these clients, trust conversations are no longer about taxes. They are about control, privacy, probate avoidance, incapacity planning, and creditor protection.

State-level taxes demand closer attention now. Twelve states plus DC impose estate taxes, with exemptions ranging from $1 million (Oregon) to figures closer to the federal level (Connecticut). Five states impose inheritance taxes (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania). Washington state applies the highest estate tax rate at 35%. For a client in Washington with an $8 million estate, state estate tax is a real concern regardless of federal exemption. For a client in a state with no estate or inheritance tax and a $2 million estate, neither federal nor state taxes apply, and the trust’s value lies entirely in its non-tax benefits.

The exemption shift has one more consequence: many existing plans are misaligned with current law. An AB trust created in 2018 when exemption was scheduled to drop may now add unnecessary complexity for a client whose estate sits well below $15 million. Simplifying these plans represents a real planning opportunity.

The Advisor’s Edge

Trust information is publicly available. Any client can look up trust definitions, compare revocable and irrevocable structures, and read about ILITs or QTIP trusts. What they cannot get from a search result is the judgment to match the right structure to their situation.

That judgment involves a specific set of analytical skills. Matching trust types to client circumstances so the recommendation fits the client’s actual family, assets, and goals rather than a generic planning template. Coordinating trust funding with beneficiary designations so the plan works as a system rather than a collection of disconnected documents. Recognizing when irrevocable structures create more complexity than value, because an ILIT or SLAT that makes sense for one client is overengineered for another. And distinguishing state-level planning needs from federal concerns, a skill that matters more than ever in the post-OBBBA environment.

The Certified Estate and Trust Specialist™ (CES™) designation develops these skills systematically. Rather than learning trust law in isolation, you build competency in the full estate planning coordination process: identifying client needs, assembling the right professional team, ensuring plans get implemented, and maintaining those plans as circumstances change.

For a deeper look at how this coordination role works in practice, see The Quarterback Model: How Financial Advisors Coordinate Estate Plans.

Sources and Notes: Trust ownership data from the 2025 Trust & Will Estate Planning Report (10,000 respondents). Federal estate tax exemption figures reflect the One Big Beautiful Bill Act, signed July 4, 2025. State estate tax data from the Tax Foundation (2025). Trust cost data from industry surveys. This article is reviewed periodically and updated when significant legal or regulatory changes occur.