How Does a Trust Work?

There are two basic types of trusts:


Revocable or Living Trust

A revocable or living trust is a trust that you can change or that can be cancelled during your lifetime. You control a revocable trust and the trust’s earnings are consolidated into your income tax returns. You may continue to manage the assets, or your financial advisor will handle management of your assets under your supervision.

A revocable trust can also be used to transfer assets at death, similar to a will, yet without the formal, court-supervised process of probate. In many states, the probate process is slow and expensive and also opens your estate to public scrutiny. Once you pass away, your wishes are final and thus the trust becomes irrevocable.


Irrevocable Trust

An irrevocable trust is a trust that cannot be changed or cancelled at any time without court approval. This trust is a separate legal entity and its own taxpayer.

The terms of many irrevocable trusts, however, allow tremendous flexibility. While many irrevocable trusts are created upon death, irrevocable trusts set up before death are often used to hold life insurance policies, gifts of assets to be made available to beneficiaries at a future time, or funds for future charitable donations. To achieve beneficial tax results, many irrevocable trusts are written to follow patterns based on the rules in the Internal Revenue Code. The structure most suited to your needs can best be determined with the help of financial, legal and tax advisors who specialize in these fields.


All trusts, revocable and irrevocable, involve three parties with distinct roles and interests:

  • The person who creates the trust (“grantor”)
  • The person or firm that is responsible for the trust (“trustee”)
  • The people or charities (current and remainder) that benefit from the trust (“beneficiaries”)

If you have questions about how a trust may benefit you and your family, schedule a meeting with your financial advisor to discuss your concerns and wishes. Your financial advisor can help you develop a comprehensive plan to carry out your legacy and can work with your attorney – or refer you to an attorney – who can draw up the legal documents you need to pursue the peace of mind you seek.  

Learn more about the different types of living and revocable trusts available to satisfy a broad range of wealth and estate planning needs.