In the world of estate planning, where many concepts already feel slightly out of reach, Trusts can certainly challenge the mind. These structures fulfill various needs and goals and can be broken down into myriad categories. In this blog, we’ll answer common questions including: What is a trust? When do I need a trust? Does a trust save on taxes? Does a trust keep creditors away?
What is a Trust?
A trust is a legal structure in which a Trustee is designated to manage assets for the benefit of one or more Beneficiaries. The person who establishes and generally funds the trust is called the “Grantor” or “Settlor.”
Often, a trust is established to ensure assets are managed in a certain way and by a certain person or person(s).
What Kinds of Trusts Are There?
There are many kinds of trusts that serve many different purposes.
One of the most common types of trusts is the Revocable Living Trust (“RLT”). In this type of trust, the Grantor, Trustee, and Beneficiary are usually the same person. The purpose of the trust is simply to remove the assets from the Grantor’s individual name to avoid Probate and to help ensure the smooth transition of assets in the event of incapacity or death. This type of trust is a great estate planning tool, but does not provide tax savings or creditor protection.
Alternatively, Irrevocable Trusts are often used for tax planning or asset protection purposes. These trusts can be established during life (an “Inter Vivos” or “Living” Trust) or upon death (a “Testamentary” Trust).
For example, during life one can establish and fund an Irrevocable Living Trust for the benefit of a spouse, children, and / or grandchildren, in order to move assets out of the taxable estate and ensure the assets are protected for generations to come. Or, in a Will you can establish a trust for the benefit of your spouse and children which protects those assets from future creditors and liability, including divorcing spouses, after you have passed. This would be an Irrevocable Testamentary Trust.
Does a Trust Save on Taxes?
Trusts can have an impact on income taxes (imposed on earnings) as well as gift and estate taxes (imposed on the transfer of wealth).
As far as income taxes are concerned, income generated by trust assets is still taxable, either to the Grantor, to the trust itself, or to a beneficiary or beneficiaries. Often, it is preferable that the Grantor be liable for income taxes because the trust is subject to compressed income tax brackets. In other words, taxes may be lower if the Grantor is still alive and is responsible for them.
In the event of a testamentary trust, the Grantor is deceased, so the income is either taxed to the trust or, in the event of a distribution to a beneficiary, can be taxed to the beneficiary.
Concerning Gift and Estate Taxes, a transfer of assets to an Irrevocable Trust created for (and controlled by) someone other than the Grantor may be a taxable gift that has to be reported and counted against a person’s “lifetime exemption.” The trust assets may then be able to grow outside of the Grantor’s taxable estate, and the appreciation can pass estate tax free. The typical Revocable Living Trust, on the other hand, has no gift or estate tax impact at all.
Is My Trust Protected from Creditors?
Some trusts are creditor-protected and some are not. Generally speaking, a revocable trust (one that the Grantor can change/amend/revoke) is not protected from the Grantor’s creditors because of the Grantor’s unrestricted access to Trust assets.
In a majority of states, creditors can also reach Irrevocable Trust assets if the Grantor is also the Beneficiary. That is, if I set up an Irrevocable Trust for my own benefit, my creditors can still reach them. However, a minority of states will protect the assets of these “self-settled” Irrevocable Trusts when structured properly under the laws of those states.
Irrevocable Trusts established for the benefit of someone else (e.g. my spouse or my child) can be protected from creditors – both the Grantor’s creditors and those of the beneficiary(ies).
How do I know if I Need a Trust and How Do I Get One Set Up?
An experienced estate planning attorney can answer both of these questions for you. Your attorney should consider your goals and evaluate whether a trust (and which kind of trust) is necessary to accomplish those goals. Trusts are certainly not a one-size-fits-all solution and many factors should be weighed.
If a Trust of any kind is necessary or helpful, the attorney would draft the trust document in a manner that is tailored to your needs and assist in the execution of the necessary documentation. The final step is to provide guidance and help transferring assets to the trust, by way of retitling accounts and executing deeds to trust for real property.
A note from Sarah: Trust planning is deeply personal, and the right structure for you depends on factors specific to your life, your family, and your goals. If any of these questions resonate with you, I’d encourage you to reach out.
At BIP Wealth, our team of trusted advisors can help clients like you evaluate whether a trust is advisable or necessary and connect you with professionals to help you put a comprehensive trust plan in place.
Frequently Asked Questions About Trusts
What is the difference between a will and a trust?
A will is a legal document that expresses your wishes for how your assets should be distributed after you die, but it has to go through probate, which is a court-supervised process that takes time and can be costly. A trust, on the other hand, holds your assets during your lifetime and transfers them to your beneficiaries outside of probate entirely. That means a faster, more private transition for your family. For most clients, the desire to avoid probate is the primary reason we explore whether a trust makes sense for them.
Does having a trust mean I avoid probate?
Generally, yes, but only for assets that are actually titled in the name of the trust. This is a detail that catches a lot of people off guard. A Revocable Living Trust is specifically designed to keep your estate out of probate court, but if you never transfer your accounts or property into the trust, those assets will still go through probate. Part of the process of setting up a trust is what’s called “funding” it, meaning retitling accounts and executing deeds so your assets are properly held by the trust.
Can a trust protect my assets from creditors?
It depends on the type of trust. A Revocable Living Trust does not provide creditor protection; because you can change or revoke it at any time, creditors can still reach those assets. An Irrevocable Trust, however, can offer meaningful protection, particularly when it’s established for the benefit of someone other than yourself, like a spouse or children. If you’re seeking creditor protection as a goal, that’s an important conversation to have with an estate planning attorney, as the rules vary significantly by state.
Who needs a trust vs. just a will?
A will alone may be sufficient for someone with a straightforward estate, few assets, and no concerns about probate, taxes, or creditor exposure. But for clients with more complex situations—a blended family, significant assets, a child with special needs, business interests, or multi-state real estate—a trust often becomes an essential part of the plan. There’s no universal answer here, which is why I always encourage people to think through their specific goals before assuming one approach is right for them.
What happens to a trust when the grantor dies?
For a Revocable Living Trust, the trust becomes irrevocable at the grantor’s death—meaning it can no longer be changed. At that point, the successor trustee steps in to manage and distribute the assets according to the trust’s terms, without the need for probate court involvement. For an Irrevocable Trust, the structure and administration at death depends on how it was originally drafted. In either case, having a clear, well-drafted trust and a trustee who understands their responsibilities makes an enormous difference in how smoothly things go for your family.
Sarah Watchko is an employee of BIP Wealth and has been serving families’ estate planning needs for nearly 20 years. This content is for informational purposes only and does not constitute legal, financial, or tax advice. Readers should consult with a qualified estate planning attorney before making any decisions related to estate planning.
