There are several major types of trusts, which I have summarized below:
Testamentary TrustA grantor creates and funds a testamentary trust under the terms of the grantor's will. The trust does not exist until the grantor's death, and all assets transferred to the trust pass through probate. By changing their will, the grantor can change the trust terms any time prior to death. Upon death, the trust becomes irrevocable. Testamentary trust can be contingent, which means the trust will be created only if certain conditions are present (for example, the beneficiaries are under a certain age).
Living Trust (Inter Vivos Trust)A grantor creates a living trust, also called an inter vivos trust, while the grantor is alive. It can end upon the grantor's death or continue according to the trust's terms. Trust property is distributed according to the terms of the trust, not the grantor's will. Thus, living trust assets do not go through the probate process.
Revocable TrustAs its name implies, a grantor can revoke or amend the terms of a revocable trust, including the beneficiaries, trustee, assets subject to the trust, trust provisions, or the grantor can dissolve the trust. Typically, when the grantor dies, the trustee distributes the assets in accordance with trust terms, not according to the grantor's will or through the probate process. Note: Unless the grantor gives another person (their spouse, for example) a "special power of appointment" to amend the trust, upon the grantor's death, the trust becomes irrevocable. Revocable trust assets are included in the grantor's estate for estate tax purposes. However, the assets are not included in the probate process, which is the reason such trusts are often utilized.
Irrevocable TrustOnce the grantor creates an irrevocable trust, the grantor cannot revoke or amend it. The grantor cannot change the beneficiaries, remove assets, or change the terms. Estate tax avoidance is the most common reason for using irrevocable trusts. This is because the trust assets, including future appreciation, are not included in the gross estate for estate tax purposes. (Note: the transfer of assets to an irrevocable trust does have potential tax implications). With careful planning, you may be able to save substantial estate taxes. Shielding assets from potential creditors is another common reason for using irrevocable trusts. There are many types of irrevocable trusts that meet various needs, including a life insurance trust, (which holds an insurance policy), a qualified personal residence trust (which holds a personal residence), a grantor retained annuity trust (which provides the grantor with an income stream).
Crummy TrustA Crummy trust is a type of trust typically used to make gifts of assets to children over time. The grantor structures the trust so that the beneficiary has the right to take possession of the gift for 30 days. This means the gift is considered a "current gift," which means it is not counted as part of the grantor's estate. If the beneficiary does not exercise the right to the current gift, it is rolled into the trust. The beneficiary has a significant incentive not to exercise their right to the immediate gift because if they do, the grantor will not make future gifts. Once the gift becomes part of the trust, it is distributed according to the trust terms.