Definition
A trust is a legal arrangement in which one party—the trustee—holds and manages property for the benefit of another party—the beneficiary—according to the terms set by the person who created the trust, called the grantor or settlor. The trustee holds legal title to the property and owes a strict fiduciary duty to administer it solely in the interests of the beneficiaries. Trusts can take effect during the grantor's lifetime or at death and may be revocable or irrevocable.
Legal Meaning
A trust separates legal ownership from beneficial enjoyment. The trustee holds legal title and has the power and responsibility to manage the assets, while the beneficiaries hold the equitable interest and are entitled to the benefits the trust provides. This separation is what makes trusts such a flexible tool in estate planning, allowing a grantor to control how and when property is used long after the trust is created.
Three roles define every trust. The grantor (also called settlor or trustor) creates the trust and transfers property into it. The trustee manages the trust property under a fiduciary duty of loyalty and prudence. The beneficiary receives the benefits. A single person can occupy more than one role; in a typical revocable living trust, the grantor often serves as the initial trustee and primary beneficiary during life.
Trusts are broadly classified as revocable or irrevocable. A revocable trust can be amended or revoked by the grantor at any time and offers flexibility and probate avoidance, but provides little tax or creditor protection because the grantor retains control. An irrevocable trust generally cannot be changed after creation; the grantor relinquishes control, which can remove assets from the taxable estate and shield them from certain creditors. State trust law, often based on the Uniform Trust Code, governs the validity and administration of trusts, with significant variation among states.
Key Points
- A trust involves three roles: the grantor who creates it, the trustee who manages it, and the beneficiary who benefits from it
- The trustee holds legal title and owes beneficiaries a strict fiduciary duty of loyalty and prudent management
- Revocable trusts can be changed or canceled by the grantor and primarily help avoid probate
- Irrevocable trusts generally cannot be changed but may offer tax and creditor advantages
- A living (inter vivos) trust is created during life; a testamentary trust is created by a will and arises at death
- Assets must be properly transferred into the trust—"funding" it—or the trust will not control them
- Trust assets that are properly funded generally avoid probate and pass privately
- Trust law varies by state, with many states adopting versions of the Uniform Trust Code
Real-World Example
James creates a revocable living trust and transfers his home, brokerage account, and bank accounts into it, naming himself as trustee and primary beneficiary during his lifetime. His trust document names his sister as successor trustee and his two children as beneficiaries after his death. Because James retains the power to amend or revoke the trust, he keeps full control of his property while alive.
When James becomes incapacitated, his sister steps in as successor trustee and manages the assets for his benefit without a court guardianship. After he dies, she distributes the trust assets to his children according to the trust terms—privately and without probate—because the trust, rather than James personally, owned the property at his death.
Revocable vs. Irrevocable Trusts
| Feature | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Can be changed or revoked | Yes, anytime by grantor | Generally no |
| Control of assets | Grantor keeps control | Grantor gives up control |
| Avoids probate | Yes, if properly funded | Yes, if properly funded |
| Creditor protection | Little to none | Possible, depending on terms |
| Estate tax treatment | Assets remain in taxable estate | May remove assets from estate |
| Common use | Probate avoidance, incapacity planning | Tax planning, asset protection, special needs |
Common Types of Trusts
Beyond the revocable and irrevocable distinction, trusts come in many specialized forms:
Living Trust
Created and effective during the grantor's lifetime, a living trust is the most common probate-avoidance tool and usually begins as revocable.
Testamentary Trust
Created through a last will and testament, this trust does not exist until the testator dies and the will is probated. It is often used to manage gifts to minors.
Special Needs Trust
Holds assets for a beneficiary with disabilities in a way that preserves eligibility for government benefits such as Medicaid and Supplemental Security Income.
Charitable Trust
Benefits a charitable purpose or organization, often combining philanthropic goals with income or estate tax planning.
Related Terms
Is a Trust Right for You?
An estate planning attorney can help you decide whether a trust fits your goals and family situation
Explore Estate PlanningWhen You Need a Lawyer
Trust law is technical, and a poorly drafted or improperly funded trust can fail to accomplish your goals. Consider working with an attorney if you:
- Want to avoid probate or plan for possible incapacity
- Have a sizeable estate that may face federal or state estate tax
- Want to provide for a beneficiary with special needs without disrupting benefits
- Need to protect assets from creditors or plan for long-term care costs
- Own property in more than one state
- Are serving as a trustee and are unsure of your fiduciary duties
An attorney can recommend the right type of trust, draft it correctly, and guide you through funding. To understand what this might cost, see our guide on understanding legal fees, and read how to choose a lawyer before hiring.
Frequently Asked Questions
What is the difference between a revocable and an irrevocable trust?
A revocable trust can be changed or canceled by the grantor at any time during their life, and its assets remain part of the grantor's estate. An irrevocable trust generally cannot be changed once created, and the grantor gives up control of the assets, which may offer benefits such as creditor protection or removing assets from the taxable estate. The right choice depends on your goals.
Do I still need a will if I have a trust?
Yes. Most people who create a living trust also sign a pour-over will. The pour-over will directs any assets that were not transferred into the trust during life to pass into the trust at death. A will is also the only document that can nominate guardians for minor children, which a trust cannot do.
Does a trust avoid probate?
Assets properly titled in a trust generally avoid probate because the trust, not the deceased individual, owns them at death. The successor trustee can distribute the assets according to the trust terms without court supervision. However, this only works for assets that were actually transferred into the trust, a step called funding the trust.
Who controls the property in a trust?
The trustee holds legal title and controls and manages the trust property, but must do so solely for the benefit of the beneficiaries under a strict fiduciary duty. In a typical revocable living trust, the person who created the trust usually serves as the initial trustee, retaining full control until they die or become incapacitated.
Are trust assets protected from creditors?
It depends on the type of trust. Assets in a revocable trust are not protected from the grantor's creditors because the grantor still controls them. Certain irrevocable trusts can provide creditor protection because the grantor has relinquished control. The rules vary significantly by state and trust type, so legal advice is essential.