INSIGHT

What is a trust?  

Tony Gales • March 26, 2025

Services: Estates, Gifts & Trusts

---

A trust is a powerful legal arrangement that allows a third party (trustee) to hold and manage assets on behalf of beneficiaries.  

Whether you’re looking to minimize estate taxes, protect family wealth across generations, maintain privacy, or establish specific conditions for asset distribution, understanding what a trust is and how it functions is essential for preserving your legacy and ensuring your wishes are carried out precisely as intended. 

What is a trust, and how does it work?  

A trust is a legal arrangement where a person or entity (the trustee) holds and manages assets for the benefit of others (the beneficiaries).  

It creates a fiduciary relationship that allows for controlled asset transfer according to specific terms established by the trust creator (the grantor).  

Trusts can be tailored to meet various financial and family goals, from tax efficiency to asset protection. They provide a structured framework for wealth transfer that can operate during your lifetime and continue to fortify your legacy. 

Types of trusts  

Various trust structures serve different purposes in estate planning, each offering unique advantages depending on your specific goals and circumstances. In general, there are two umbrella distinctions:  

Revocable trusts 

Revocable trusts, also called living trusts, can be modified or terminated by the grantor during their lifetime. These trusts allow you to maintain control over your assets while establishing a framework for their management and distribution.  

The most common type is the revocable living trust, which holds your assets during life and distributes them according to your wishes after death.  

Consider a revocable trust when you want flexibility to adjust your estate plan as circumstances change, desire to avoid probate, or need a mechanism for managing assets should you become incapacitated. 

Irrevocable trusts 

Irrevocable trusts cannot be altered or terminated without beneficiary approval once established. When you place assets in an irrevocable trust, you legally remove them from your estate, relinquishing ownership and control.  

Common irrevocable trusts include life insurance trusts, charitable trusts, and special needs trusts. These structures are ideal when you want to minimize estate taxes, protect assets from creditors, provide for beneficiaries with special needs, or make significant charitable gifts while potentially receiving tax benefits. 

Why create a trust?  

A trust document can be a powerful tool for preserving wealth and ensuring your wishes (and wealth) are distributed in the way that truest to you and your goals. Let’s take a look at some of the key benefits of creating a trust.  

Secure efficient wealth transfer to future generations 

Trusts provide a structured way to transfer assets to children, grandchildren, and beyond while maintaining control over how and when those assets are distributed.  

You can establish specific conditions for inheritance, such as reaching certain ages or milestones, completing education, or demonstrating financial responsibility. This protection is particularly valuable when beneficiaries are minors, have special needs, or may require assistance managing their inheritance. 

Minimize the burden of estate taxes 

Trusts can play a crucial role in minimizing estate tax liability. By removing assets from your taxable estate through certain irrevocable trust structures, you may significantly reduce the tax burden that would otherwise fall on your heirs.  

This strategic approach allows more of your hard-earned wealth to benefit your loved ones rather than being diminished by taxation. 

Protect your assets 

A well-structured trust can shield your wealth from various threats, including creditors, lawsuits, and potential divorce settlements. Certain irrevocable trusts create a legal barrier between your personal assets and outside claims, providing peace of mind that your family’s financial security remains intact regardless of unforeseen circumstances. This protection becomes increasingly valuable as wealth grows and potential exposure to liability increases. 

Enhance your estate’s privacy 

Unlike wills that become public record through probate (more on that in a minute), trusts offer a level of privacy that many wealthy families value. The terms, assets, and beneficiaries of your trust remain confidential, shielding your family’s financial matters from public scrutiny.  

This privacy can be especially important for high-profile individuals or those concerned about potential conflicts arising from public knowledge of their estate plans. 

Avoid probate 

Assets held in trust bypass the often lengthy, costly, and public probate process. This means your beneficiaries receive their inheritances more quickly, with significantly reduced administrative costs and court fees.  

Probate avoidance is particularly beneficial for families with real estate in multiple states, as it eliminates the need for ancillary probate proceedings in each jurisdiction where property is owned. 

Plan for incapacitation 

Trusts provide seamless management of your affairs should you become unable to manage them yourself.  

Unlike powers of attorney, which may face challenges or delays, a properly funded trust allows your chosen successor trustee to step in immediately to handle your financial matters, pay bills, and manage investments without court intervention. This continuity helps to ensure your care needs are met and your financial affairs remain in order during vulnerable periods. 

Plan for beneficiaries with special needs 

For trust beneficiaries with disabilities, specialized trusts can provide financial support while preserving eligibility for essential government benefits like Medicaid and Supplemental Security Income (SSI).  

These carefully crafted arrangements help ensure your loved ones with special needs maintain access to necessary services while enjoying an enhanced quality of life through your trust’s supplemental support. 

Create a business succession plan 

Trusts can be instrumental in creating a smooth exit plan for family businesses. By establishing clear guidelines for ownership transfer, management succession, and operational continuity, a trust helps preserve the business you’ve built while minimizing disruption during ownership transitions.  

This structured approach can be crucial for maintaining business value and preventing conflicts among family members with varying levels of interest or involvement in the company. 

Minimize interpersonal conflict 

A well-structured trust can help prevent family disputes by clearly outlining your intentions and establishing a framework for asset distribution. By removing ambiguity and appointing a trusted fiduciary to oversee the process, you reduce the likelihood of misunderstandings or contested distributions that can damage family relationships during an already difficult time. 

Uphold your legacy 

Trusts allow you to extend your influence beyond your lifetime, supporting values and causes important to you. Whether establishing educational requirements for beneficiaries, supporting charitable organizations, or preserving family businesses, a trust can help ensure your legacy continues according to your vision for generations to come. 

How are trusts taxed? 

Understanding the tax implications of trusts is essential for individuals seeking to preserve wealth across generations.  

The taxation of trusts involves multiple layers of complexity, with different rules applying based on trust structure, income type, and beneficiary relationships. 

Types of tax affecting trusts 

Trusts may be subject to several types of taxation, each with distinct rules and rates.  

• Income tax applies to earnings generated by trust assets, including interest, dividends, and rental income.  
• Capital gains tax affects appreciation in trust assets when sold.  
• Estate taxes may apply to assets transferred into or out of certain trusts, while generation-skipping transfer tax specifically targets wealth transfers that skip a generation. 

Next, let’s review how different trusts are taxed.  

Taxation of revocable trusts 

Revocable trusts offer flexibility but limited tax advantages. Since the grantor maintains control, all income, deductions, and credits flow through to the grantor’s personal tax return.  

The trust essentially remains “invisible” for income tax purposes during the grantor’s lifetime. Upon death, assets in a revocable trust are included in the grantor’s taxable estate, though they avoid probate. 

Taxation of irrevocable trusts 

Irrevocable trusts can provide significant tax benefits by removing assets from the grantor’s estate. When properly structured, these trusts can reduce estate tax liability and provide asset protection from creditors and lawsuits.  

However, the tax treatment varies significantly based on whether the trust is classified as a grantor or non-grantor trust. 

Grantor vs. non-grantor trust taxation 

In grantor trusts, the person who created the trust is considered the owner for income tax purposes, meaning all income is taxed on their personal return regardless of who receives distributions. This arrangement can be advantageous as it allows trust assets to grow without being depleted by trust-level taxes. 

Non-grantor trusts are treated as separate tax entities with their own tax identification number. The trustee must file Form 1041, and the trust pays taxes on income it retains. Any income distributed to beneficiaries is taxed at their individual rates, with the trust receiving a corresponding deduction.  

Transactions between the grantor and a non-grantor trust are recognized for tax purposes, potentially triggering capital gains tax on appreciated assets. 

Specialized trust tax strategies  

We’ve talked about the fact that trusts can be tax-efficient wealth preservation vehicles, but what does this look like? 

Every person’s situation and goals is different but here are some general trust structures that can minimize taxes:  

• Generation-skipping trusts allow assets to pass to grandchildren without triggering estate taxes at the children’s generation 
• Dynasty trusts can potentially avoid estate taxes indefinitely across multiple generations 
• Grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs) can transfer appreciation to beneficiaries with minimal gift tax impact 
• Charitable lead annuity trusts (CLATs) provide income to charities for a period before assets pass to family members, potentially reducing overall tax liability 

Strategic tax planning can help minimize tax burdens through techniques like: 

• Timing distributions to beneficiaries in lower tax brackets 
• Selecting tax-efficient investments within the trust 
• Utilizing deductions available to trusts 
• Implementing specialized trust structures designed for specific tax advantages 

And more. 

Remember, no two families are the same, making a custom estate planning strategy critical to maintaining your legacy and vision.  

Planning your trust with BPM 

Trusts are powerful tools for preserving wealth, protecting assets, and ensuring your legacy endures exactly as you envision. As we’ve explored, the right trust structure can help you avoid probate, minimize taxes, protect privacy, and provide for loved ones according to your specific wishes. 

With significant tax law changes on the horizon as exemptions are scheduled to sunset at the end of 2025, now is an ideal time to review your estate plan. BPM’s estates, gifts, and trusts team takes a proactive and strategic approach to help develop a plan that meets your expectations while demonstrating foresight in the face of changing laws. 

Ready to feel confident that your family and wishes are cared for? Contact BPM’s estate planning team today to build custom solutions that put your people first.