The first split: revocable or irrevocable
Every trust has someone who creates it (the settlor or grantor), someone who manages it (the trustee) and someone who benefits from it (the beneficiary). The most important difference between trusts is whether the settlor can undo it.
| Revocable trust | Irrevocable trust | |
|---|---|---|
| Can you change or cancel it? | Yes, any time | Generally no |
| Who controls the assets? | You | The trustee, under the trust's terms |
| Avoids probate? | Yes | Yes |
| Out of your taxable estate? | No | Often yes |
| Protects assets from creditors or Medicaid? | No | Can, depending on design and timing |
| Income tax | On your own return | Often a separate taxpayer |
Irrevocable trusts trade control for protection. That's why they're used for tax planning, Medicaid planning and special needs, while most people's basic estate plan uses a revocable trust. About three dozen states plus D.C. have adopted a version of the Uniform Trust Code, which standardizes many of the basic rules.
10 common types of trusts
1. Revocable living trust
Created during your life, controlled by you, and changeable at any time. Its main job is avoiding probate and handling incapacity. It doesn't save taxes or protect assets. See our full guide: revocable living trust explained.
2. Irrevocable trust
Once property is in it, you generally can't take it back. Depending on how it's written, its assets can be outside your estate and beyond your creditors' reach. Many of the types below are irrevocable trusts built for a specific purpose.
3. Testamentary trust
A trust written into your will that only comes into existence when you die. It's common for leaving money to minor children. Because it's created by the will, the assets go through probate first.
4. Special needs trust (first-party)
Holds the assets of a person with a disability, for example an injury settlement or an inheritance, without disqualifying them from SSI and Medicaid. Federal law (42 U.S.C. § 1396p(d)(4)(A)) requires that the beneficiary be under 65 and disabled, that the trust be for their sole benefit, and that the state be repaid for Medicaid costs when they die. It can be set up by the person themselves, a parent, grandparent, guardian or a court. Parents who leave money for a disabled child usually use a third-party special needs trust funded with the parents' own money, which doesn't require Medicaid payback.
5. Pooled trust
Run by a nonprofit, with a separate account for each beneficiary but the money invested together (42 U.S.C. § 1396p(d)(4)(C)). There's no age limit, though funding one at 65 or older can trigger a Medicaid transfer penalty in some states.
6. Medicaid asset protection trust
An industry name, not a legal category, for an irrevocable trust that pays you income but can never pay you the principal. The goal is to keep the house or savings from counting toward Medicaid eligibility for nursing home care. The catch is the five-year look-back: Medicaid reviews transfers made in the 60 months before you apply, so it only works if you set it up well in advance.
7. Qualified personal residence trust (QPRT)
You put your home into the trust and keep living in it for a set number of years. When the term ends, the house goes to your children. The gift is valued at a discount because you kept the right to live there (IRC § 2702(a)(3)(A)). It's mainly useful for very large estates. If you die before the term ends, the house is back in your estate. In Michigan, a QPRT grantor can keep the principal residence exemption.
8. Irrevocable life insurance trust (ILIT)
Owns a life insurance policy so the payout isn't part of your taxable estate. If you transfer an existing policy into it and die within three years, the proceeds come back into your estate (IRC § 2035).
9. Charitable remainder trust (CRT)
Pays you (or someone you choose) 5% to 50% a year of the trust's value, for life or up to 20 years, then leaves the rest to charity (IRC § 664). The remainder has to be worth at least 10% at the start. Because the trust doesn't pay income tax on sales inside it, people sometimes use one to sell a highly appreciated property without an immediate capital gains bill.
10. Spendthrift trust
Any trust with a clause preventing beneficiaries from selling or pledging their share and preventing their creditors from taking it before it's paid out. Under the Uniform Trust Code, simply calling it a "spendthrift trust" is enough. It protects heirs who are bad with money or in debt, though some creditors, such as child support, can still reach it.
Bonus: land trust
Used mainly in Illinois and Florida. The trustee holds title to real estate and the beneficiary's interest is treated as personal property, which keeps the owner's name off the public record. Because the beneficiary doesn't technically own the real estate, a land trust generally doesn't qualify for Florida's homestead exemption. In Illinois, beneficiaries who live in the home can still get the homeowner exemption with the trust document.
What trusts mean for your house and property taxes
- Revocable trusts usually don't change your property tax at all. You keep the homestead exemption in Florida, Texas, Michigan and Illinois if you're the beneficiary living in the home, and California doesn't reassess. Some counties want to see the trust. Details by state are in our revocable trust guide.
- Irrevocable trusts are riskier. California reassesses a transfer to an irrevocable trust unless you're the sole present beneficiary or an exclusion like the parent-child exclusion applies. Michigan uncaps taxable value unless you or your spouse is the sole present beneficiary. Florida keeps the homestead only if you keep a lifetime right to live there. Texas requires a rent-free right to occupy.
- At death, the transfer from the trust to your heirs can trigger reassessment and the loss of your exemptions just like any other inheritance. See property taxes on an inherited house.
If all you need is to keep the house out of probate, a transfer on death deed or lady bird deed may do it more cheaply. See living trust vs. lady bird deed vs. TOD deed.
How many trusts are there?
About 3.2 million estate and trust income tax returns (Form 1041) were filed for tax year 2022, including about 1.5 million complex trusts and 547,000 simple trusts. That doesn't count most living trusts, because a revocable trust usually reports its income on the creator's personal return and files nothing of its own.
Sources
Special needs and pooled trust rules are from 42 U.S.C. § 1396p and the Social Security Administration's POMS SI 01120.203. Federal tax rules are from IRC §§ 664, 2035, 2038 and 2702 and the IRS Instructions for Form 1041. Spendthrift rules follow Uniform Trust Code § 502 as adopted by the states. Land trust rules are from 765 ILCS 405 and Fla. Stat. § 689.071. Property tax rules are from Fla. Stat. § 196.041, Tex. Tax Code § 11.13(j), California BOE Property Tax Rule 462.160, Michigan Treasury guidance and the Cook County Assessor. Trust return counts are from IRS Statistics of Income (fiduciary returns, tax year 2022). This is general information, not legal advice.