How a trust works
Every trust has three roles. The grantor, also called the settlor or trustor, creates the trust and moves property into it. The trustee, a person or an institution such as a bank, takes legal title to that property and manages it. The beneficiaries are the people or charities entitled to benefit from it, now or later. One person can fill several roles: in a typical revocable living trust you are the grantor, the trustee and the beneficiary while you live, and a successor trustee you name takes over later.
The key idea is split ownership. The trustee holds the assets in name but must use them only as the trust document directs and only for the beneficiaries. That makes the trustee a Fiduciary, with duties the Consumer Financial Protection Bureau sums up in four points: act only in the beneficiaries’ interest, manage the property carefully, keep it separate from your own, and keep good records. A trustee who breaks those duties can be removed, sued or made to repay losses.
The main types of trusts
Trusts are sorted along a few independent lines, summarized in the table below. The first is timing. A living trust, also called an inter vivos trust, is created and funded during your life. A testamentary trust is written into your Will and comes into being only after death, so its assets first pass through Probate.
The second is control. You can change or cancel a revocable trust whenever you like, so the law still treats its assets as yours. An irrevocable trust generally can’t be undone, which is what lets it move assets out of your taxable estate.
The third is purpose. A special needs trust supports a person with a disability without disqualifying them from means-tested benefits. A charitable remainder trust pays you income and leaves the rest to charity. An irrevocable life insurance trust keeps life insurance proceeds outside the estate. A spendthrift trust stops a beneficiary from pledging future payments and keeps most of their creditors from reaching the money before it is paid out. One trust often carries several labels at once, such as an irrevocable, non-grantor spendthrift trust for a grandchild.
How trusts are taxed
For income tax, the question that matters is whether the trust is a grantor trust. If the grantor keeps certain powers, such as the right to revoke, the IRS disregards the trust and taxes the income from the part the grantor controls to the grantor on their own return. A trust the grantor can revoke always works this way.
A non-grantor trust is a separate taxpayer. It must file Form 1041 for any year it has taxable income, gross income of $600 or more, or a nonresident alien beneficiary. Its tax brackets are extremely compressed. For 2026, income a trust keeps is taxed at 10% up to $3,300, 24% up to $11,700, 35% up to $16,000 and 37% above that, while a single person doesn’t reach 37% until taxable income passes $640,600. Long-term gains and qualified dividends kept in a trust are taxed at 0% up to $3,300, 15% up to $16,250 and 20% above. The 3.8% net investment income tax applies to undistributed investment income once the trust’s adjusted gross income passes $16,000.
A trust gets only a small exemption: $300 if it must pay out all its income each year and $100 otherwise. Income it does pay out is generally deducted by the trust and taxed to the beneficiaries instead, which is how many trusts avoid the top rate. The trust fund page explains how beneficiaries are taxed on those payments.
What a trust can and can’t do
A trust is a tool for control, and what it achieves depends on the type. A funded living trust can keep assets out of probate, let a successor trustee step in without a court-appointed guardian if you become incapacitated, keep your plan private, and hold money for heirs who are young or vulnerable, with payouts spread over years.
What a trust can’t do matters just as much. A revocable trust saves no income tax or estate tax and gives no protection from your own creditors. Only an irrevocable trust you don’t benefit from can take assets out of your taxable estate, and with a federal exemption of $15,000,000 per person in 2026, estate tax touches few families. Most people who set up a trust do it for control, not taxes.
Some accounts are trusts in law already: the tax code defines an IRA as a trust, or a custodial account treated as one, held for the owner and their beneficiaries. You don’t retitle an IRA into your own trust. To have a trust receive it, you name the trust on the beneficiary form, which brings its own payout rules for an inherited IRA.
Situations where families often choose a trust include:
- Minor children, who can’t legally manage an inheritance on their own.
- A blended family, where a surviving spouse needs income but children from an earlier marriage should receive what remains.
- A beneficiary with a disability who relies on means-tested benefits.
- Real estate in more than one state, which could otherwise need a separate probate in each.
- An heir likely to spend a lump sum quickly or lose it to creditors.
How to set up a trust
Most people have an estate-planning attorney draft the trust, because state law sets the signing formalities and the exact wording decides who controls the money and how it is taxed. Signing is only half the job, because a trust controls only what is put into it. Real estate needs a new deed, bank and brokerage accounts must be retitled to the trustee, and accounts that pass by beneficiary designation go to whoever the form names. The usual steps are:
- Set the goal, such as avoiding probate, managing money for young children, protecting a beneficiary or shrinking a taxable estate. The goal decides whether the trust is revocable or irrevocable.
- Choose a trustee and at least one successor, and decide who benefits, when and on what terms.
- Sign the document with the formalities your state requires.
- Fund it, then keep it funded: title new assets to the trust and review beneficiary forms after a marriage, divorce, birth, death or move.
Illustrative numbers
Tax on $30,000 of interest kept inside a trust in 2026
Interest the trust earns and keeps$30,000
Exemption for a trust that may keep income−$100
Taxable income$29,900
Income tax: $3,851 + 37% × $13,900 over $16,000$8,994
Net investment income tax: 3.8% × $13,900$528
Same $30,000 for a single filer after the $16,100 standard deduction$1,420
Kept in the trust, the income costs about $9,522 in federal tax, nearly 32% of it. Paid out to an adult beneficiary with no other income, it would be taxed at marginal rates of 10% and 12%, about $1,420, which is why many trusts distribute income. Fees and state tax are ignored.
At a glance
Five ways to classify a trust
| Question | Options | Why it matters |
|---|---|---|
| When does it start? | Living (during life) or testamentary (created by a will at death) | A testamentary trust is funded through probate; assets already in a living trust skip it |
| Can the grantor change it? | Revocable or irrevocable | Only an irrevocable trust can remove assets from the grantor’s taxable estate |
| Who pays the income tax? | Grantor trust or non-grantor trust | A non-grantor trust pays its own tax, at 37% above $16,000 of taxable income in 2026 |
| Must income be paid out? | Simple trust or complex trust | A simple trust pays out all income each year; a complex trust may keep it or give to charity |
| What is it for? | Special needs, charitable, life insurance, spendthrift, generation-skipping and more | The purpose drives the drafting rules and the tax result |
Put it in your plan
Trust in MoneyWhatIf
MoneyWhatIf does not model trusts; its estate estimate does not infer them or treat one as a separate owner or taxpayer. The Estate page does show what many trusts are meant to protect: it follows your projected final-year assets through debt, estimated taxes and settlement costs to an estimated net for beneficiaries. You can change the administration-cost assumption, 1% by default, or switch stepped-up basis off to see how much each choice moves that net.
Open your forecastCommon questions
Trust FAQs
Do you need to be wealthy to set up a trust?
No. There is no minimum size, and many trusts hold modest sums, such as life insurance proceeds for young children. With the federal estate tax exemption at $15,000,000 per person in 2026, the usual reasons are practical: avoiding probate, planning for incapacity, and controlling when and how heirs receive money. A trust does cost more to set up than a simple will, so its value depends on your assets, your family and your state’s probate process.
Who owns the property in a trust?
The trustee holds legal title and manages the property, while the beneficiaries hold the right to benefit from it. In a revocable trust, the grantor keeps full control and is still treated as the owner for income and estate tax purposes. In an irrevocable trust, the grantor usually gives up ownership for good, which is what moves the assets out of the grantor’s estate.
Does a trust need its own tax ID number?
It depends on the type. The IRS says most people with a revocable living trust can report its income on their own return under their own taxpayer number, which it calls the least burdensome method. An irrevocable non-grantor trust needs its own employer identification number and files Form 1041. When the grantor dies, a revocable trust must get its own number, whether or not it is combined with the estate for tax purposes.
Can a trustee also be a beneficiary?
Yes, and it is common. In a revocable living trust you usually hold all three roles while you live. Elsewhere, a family member who is also a beneficiary often serves as trustee, but a power to pay themselves for any purpose can put the assets in their own taxable estate, so it is usually limited to health, education, maintenance and support. If one person becomes the only trustee and the only beneficiary, state law may treat the trust as ended.