What Is a Trust and How Does It Work in Estate Planning

Summary: When planning for the future, a trust can be an effective tool to secure your family’s well-being. This article outlines different trusts, and how they function, and important factors to consider when setting up a trust to ensure it aligns with your estate planning goals.

When you think about the future and the legacy you intend to leave behind, it’s natural to want your family to be okay after you’re gone. You’ve most likely thought about creating a will, if you haven’t already done so, to help ensure that your belongings go to the right people. But, have you considered how you can do all of this and more with a trust?

Basically, a trust is a legal arrangement that allows someone (known as a grantor) to give control of their stuff to someone else (the trustee) to manage it for a third person (the beneficiary). But it is also more than just a way to transfer assets — it can offer flexibility, security and privacy.

Trusts aren’t just for people with big estates, they’re great for anyone who wants more control over their assets. It lets you dictate how your assets are managed while you’re alive and how it will be distributed after you’re gone. With a well-drafted trust, legal hassles and delays may also be avoided.

Key components of a trust

A typical trust has three key components:

• Grantor: The grantor (also called the settlor or trustor) is the individual who creates the trust. This is the person who transfers their assets into the trust and establishes the rules that govern how the assets will be managed and distributed. The grantor can set detailed instructions, such as who receives the assets, when, and under what circumstances.
• Trustee: The trustee is the person or entity responsible for managing the trust assets. They are bound by a fiduciary duty, meaning they must act in the best interests of the beneficiaries. The trustee follows the guidelines set by the grantor, whether that involves distributing income or preserving the assets for future generations.
• Beneficiary: The beneficiary is the person or group for whom the trust is intended. This can be family members or charitable organizations, depending on the grantor’s wishes. Beneficiaries receive the financial benefits of the trust, which may include income during the trust’s operation or assets distributed after the grantor’s death.

Types of trusts in estate planning

Trusts come in many forms, each offering distinct benefits depending on what you want to accomplish. There are two common types of estate trusts:

Revocable trust

A revocable trust, also known as a living trust, is one that you can alter or revoke during your lifetime. This type of trust allows you to maintain control over your assets while you’re alive and ensures they are passed smoothly to beneficiaries after your death, avoiding probate (the legal process of validating a will).

Though revocable trusts are flexible, they don’t protect your assets from creditors or lawsuits since the assets remain part of your taxable estate.

Irrevocable trust

Altering an irrevocable trust isn’t easy, like with a revocable trust; doing so might affect your estate taxes. Because trust assets are separate from your estate, they are protected from creditors and lower your tax liability. This type of trust is often used by individuals with large estates to minimize taxes and shield assets from lawsuits.

Other types of trusts

Here are some other types of trusts you can explore as part of estate planning:

Testamentary trust

A testamentary trust is established through a will and only becomes effective after the grantor’s death. It’s a good option for parents wanting to delay asset distribution to their minor children until they reach legal age. However, since testamentary trusts are tied to the will, they must pass through probate before assets can be distributed.

Special needs trust

A special needs trust provides for the financial well-being of a person with a disability without affecting their eligibility for government benefits, such as Medicare, Medicaid or Supplemental Security Income (SSI). This type of trust ensures that the beneficiary receives support without losing access to essential public assistance.¹

Charitable trust

Charitable trusts allow clients to meet their charitable, income and legacy goals during life and at death, all while offering the grantor beneficial tax incentives. The two main types are charitable lead trusts (CLTs), which provide income to a charity for a set term or during the grantor’s life, while then transferring property to the family or designated beneficiaries at death, and charitable remainder trusts (CRTs), which give income to beneficiaries for a set term or during the grantor’s life before donating the trust assets to the charity at death.

How does a trust work?

Using trusts in estate planning gives you ways to manage and protect your assets while ensuring they’re distributed according to your wishes. But how exactly does a trust work in an estate plan?

Here are the basic steps:

1. With the help of an attorney, draft a trust document outlining your wishes or the terms of the trust. Clearly define the roles of the trustees, specify the beneficiaries, and list the assets included in the trust.
2. Fund the trust by transferring assets, which can include cash, real estate, stocks or other personal property.
3. Once the trust is funded, the trustee can now manage the trust assets, which may include making investment decisions, paying taxes and other debts, and complying with any legal obligations.
4. In the event of your passing, the trustee will have the task of distributing the assets. The distribution can be staggered at specific ages or provided as a lump sum, depending on what you have specified.

Make the right call with your trust

Having a trust can be beneficial to your estate and overall financial plan.

If you are considering setting up a trust, you should clearly define your goals so you can make the appropriate choice. Most importantly, it’s recommended to work with an experienced trust attorney to guide you through the process and draft a trust that works best for you.

Mutual of Omaha can help. Contact one of their financial professionals to help you and your estate planning attorney navigate the complexities of setting up and funding your trust.

For more information on estate planning, start here.

FAQs

Q1: What are some common assets you can put into a trust?

People often choose to place various assets into a living trust. These can include real estate, financial accounts, life insurance, annuities, personal properties like homes or collectible vehicles, business interests, and even cryptocurrency. The decision on what to place in a trust should align with your goals, such as estate planning, asset protection, or managing assets for minors. However, not every asset is suitable for a trust, like Social Security benefits, health savings accounts, and cash. It’s advisable to consult with an estate planning attorney or financial professional to determine the best assets for your trust based on your individual situation.

Q2: Why would you choose a trust over a will?

Wills take effect after you pass away, whereas trusts can manage your assets while you’re still alive. If avoiding probate is a priority, setting up a simple trust might be beneficial. Trusts also offer more privacy since court records will only list the trust itself, not the details of the assets or beneficiaries. Wills are public records, meaning anyone can access that information. Additionally, wills do not avoid estate taxes, but irrevocable trusts, for example, can provide tax benefits and help protect your estate from creditors. Regardless of whether you choose a will or a living trust, it’s crucial to ensure your assets are not left to be divided by state laws.

Q3: What is the best trust for estate planning?

The best trust for estate planning varies depending on your goals. Many people choose a revocable living trust, which gives you control to manage while you’re still alive. With a revocable trust, you can make changes, move assets in and out, or even cancel them. After you pass away, everything in the trust goes directly to your beneficiaries without going through probate. This also helps keep things about your estate private. An irrevocable trust may be a better option if you need to protect your assets from lawsuits and creditors. Once you set up an irrevocable trust, it can’t be changed easily. Lowering estate taxes is another benefit.

Sources:

1. Special Needs Answers, What’s a Special Needs Trust For, and How Can It Help? March 2025.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.  Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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