A trust fund is a legal arrangement in which one person, called the grantor, transfers ownership of money or property to a trustee, who manages those assets for someone else, the beneficiary, under terms written into a trust document. The trustee holds legal title; the beneficiary holds the right to benefit. That split is what lets a trust move wealth between people or generations, hold assets for someone who shouldn’t manage them directly, and keep property outside the probate court process after the grantor dies.
The Three Roles Behind Every Trust
A trust always involves three positions, though one person can sometimes fill more than one of them.
The grantor (also called the settlor) creates the trust, writes its terms, and transfers assets into it. The grantor decides who manages the property, who benefits from it, and under what conditions.
The trustee is the individual or institution that manages the trust’s assets. A trustee owes a fiduciary duty to the beneficiaries, meaning they must act with loyalty and prudence and manage the trust solely in the beneficiaries’ interest. If a trustee breaches that duty, a court can order them to reimburse the trust or remove them from the role. Professional trustees such as banks and trust companies typically charge annual fees based on the value of assets under management, commonly around 1% per year and ranging roughly from 0.5% to 1.5% depending on size and complexity.
The beneficiary is the person or people entitled to receive income, assets, or other benefits from the trust. Beneficiaries generally can’t sell or manage trust property directly; their rights are limited to what the trust document gives them.
The Main Types of Trust Funds
Trusts fall into a few overlapping categories based on when they take effect and how much control the grantor keeps.
Living Trusts and Testamentary Trusts
A living trust, also called an inter vivos trust, is created and funded while the grantor is alive. It takes effect as soon as the grantor signs the document and transfers assets into it. Its main practical advantage is probate avoidance: because the trust owns the assets, not the grantor personally, those assets can pass to beneficiaries after death without going through probate court, which is public and often slow.
A testamentary trust is written into a last will and testament. It doesn’t exist until the grantor dies, and the will must go through probate before the trust is created and funded.1Justia. Testamentary Trusts Under the Law Its creation becomes public record and is subject to court oversight, which a living trust is not.
Revocable Trusts and Irrevocable Trusts
A revocable trust lets the grantor change the terms, swap beneficiaries, or dissolve the trust entirely at any time. The grantor often serves as their own trustee during their lifetime and keeps full day-to-day control. The trade-off is that because the grantor retains control, the assets are still treated as part of the grantor’s personal estate for creditor and tax purposes.
An irrevocable trust, once signed and funded, generally can’t be changed or revoked without a court petition or the consent of all beneficiaries. The grantor gives up ownership and control. That loss of control is the point: it’s what creates the trust’s tax and asset-protection benefits, because the property is no longer legally the grantor’s.
Special Needs Trusts
A special needs trust holds assets for a person with a disability without disqualifying them from government benefits like Supplemental Security Income or Medicaid. It pays for things those programs don’t cover, such as personal care items, recreation, or supplemental therapies, while keeping the beneficiary’s countable resources low enough to preserve eligibility. A first-party version, funded with the disabled person’s own money, must repay the state for Medicaid expenses from anything left when the beneficiary dies. A third-party version, funded by a parent, grandparent, or someone else, doesn’t carry that payback requirement.2Social Security Administration. Exceptions to Counting Trusts Established on or After January 1, 2000
What You Can Put in a Trust
A trust can hold almost any type of property: real estate, bank accounts, brokerage accounts, business interests, life insurance policies, and personal property. The range is broad, but listing something in the trust document isn’t enough. Each asset has to be formally transferred through a step called re-titling or funding.
Re-titling means changing the legal ownership from your personal name to the name of the trust, for example from “Jane Smith” to “Jane Smith, Trustee of the Jane Smith Revocable Trust.” Real estate requires recording a new deed. Financial accounts require updating the registration with the bank or brokerage. Until an asset is properly re-titled, it isn’t part of the trust, and if it’s left in your personal name it may end up in probate after your death anyway, defeating one of the main reasons for having a trust in the first place.
How Beneficiaries Receive Assets
The trust document controls when and how beneficiaries get paid. Distribution provisions generally take one of three forms.
Mandatory distributions require the trustee to pay out specific amounts or all trust income at set intervals, such as all net income each quarter. The trustee has no discretion to hold back.
Discretionary distributions give the trustee judgment over timing and amount. Many trusts narrow that discretion using an ascertainable standard, most commonly health, education, maintenance, and support, abbreviated HEMS. Under a HEMS standard, the trustee can only distribute funds for those four purposes, which keeps the trustee’s power from being broad enough to trigger unwanted tax consequences for the beneficiary.
Milestone-based distributions release assets when a beneficiary hits a certain age or meets a specific condition. A common approach staggers the payouts, for instance one-third at age 25, half of what remains at 30, and the rest at 35.
When a trust distributes income, the beneficiary receives a Schedule K-1 (Form 1041) from the trustee showing their share of the trust’s income, deductions, and credits for the year. Interest, dividends, and capital gains from the K-1 get reported on the beneficiary’s personal return in the usual places.3IRS. 2025 Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR
How Trust Funds Are Taxed
Trusts have their own federal tax rules, and the treatment depends heavily on whether the trust counts as a grantor trust or a non-grantor trust.
Grantor Trusts
A revocable trust, and certain irrevocable trusts where the grantor keeps specified powers, is a grantor trust for income tax purposes. The IRS doesn’t recognize it as a separate taxable entity. All income earned by the trust goes on the grantor’s personal tax return and is taxed at the grantor’s individual rate.4Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Facts (Section II) In most cases no separate trust return is required.
Non-Grantor Trusts
An irrevocable trust where the grantor has given up all retained powers is a non-grantor trust. It files its own return on Form 1041 and pays tax on any income it keeps. The trust must file Form 1041 once it has gross income of $600 or more for the year.5Internal Revenue Service. File an Estate Tax Income Tax Return Income distributed to beneficiaries is deducted from the trust’s taxable income and reported on each beneficiary’s return through Schedule K-1.6Office of the Law Revision Counsel. 26 U.S. Code 641 – Imposition of Tax
Non-grantor trust brackets are steeply compressed compared to individual ones. For 2026:
- 10% on taxable income up to $3,300
- 24% from $3,301 to $11,700
- 35% from $11,701 to $16,000
- 37% on anything over $16,000
A trust hits the top 37% rate at just $16,000 of taxable income, compared to over $640,000 for an individual.7Internal Revenue Service. 2026 Form 1041-ES That compression is why many trusts are designed to push income out to beneficiaries, who usually sit in lower personal brackets, rather than hold it inside the trust.
Estate and Gift Tax
Assets in a revocable trust are still counted in the grantor’s taxable estate at death, because the grantor retained the power to revoke. Assets properly transferred to an irrevocable trust are generally removed from the estate, which can reduce or eliminate federal estate tax on larger estates. For 2026, the federal estate tax exemption is $15,000,000 per individual, reflecting the increase enacted by the One, Big, Beautiful Bill signed into law on July 4, 2025.8Internal Revenue Service. Whats New – Estate and Gift Tax The annual gift tax exclusion, the amount you can give any one person in a year without touching your lifetime exemption, is $19,000 for 2026.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
Protection From Creditors and Lawsuits
A common reason to set up a trust is to shield assets from creditors, but how much protection you actually get depends on the type of trust.
A revocable trust offers essentially no creditor protection during the grantor’s lifetime. Because the grantor can pull assets back at any time, courts treat trust property as the grantor’s own, and creditors can reach it the same way they could any personal asset. An irrevocable trust is much stronger. Once the grantor gives up control, the assets generally aren’t available to satisfy the grantor’s personal debts or judgments.
For the beneficiary’s side, many trusts include a spendthrift clause. It prevents beneficiaries from pledging future distributions as collateral and blocks most creditors from placing liens on trust assets before they’re distributed. Not every state gives spendthrift language the same weight, and some states carve out exceptions for creditors like child support claimants or the IRS. Once money is actually distributed to a beneficiary, it becomes personal property and creditors can generally reach it.
What Setting Up a Trust Requires
A valid trust needs a written document, usually called a trust instrument or declaration of trust, that contains several core elements:
- Clear intent to create a trust rather than to make an outright gift
- Legal capacity, meaning the grantor is of sound mind and at least 18
- Identified beneficiaries
- Trustee powers and duties, including how assets are to be invested and distributed
- Identified trust property, often listed in an attached schedule
Signing formalities vary. Some states require witnesses, some require only notarization, and some require neither. If the trust will hold real estate, the deed transferring the property into the trust almost always has to be notarized and recorded with the county.
Attorney fees for drafting typically run from about $600 to $3,000 or more depending on complexity. A simple revocable living trust for one person sits at the lower end. Trusts with tax-planning provisions, multiple beneficiaries, or special needs language cost more. Some attorneys offer flat-fee packages that bundle the trust with a pour-over will, powers of attorney, and other supporting documents.
What the Trustee Has to Do Afterward
Creating and funding the trust isn’t the end. Trustees have ongoing legal and administrative duties that continue for as long as the trust exists.
Most trusts need their own Employer Identification Number from the IRS, separate from the grantor’s Social Security number. A revocable trust where the grantor is also the sole trustee and beneficiary may use the grantor’s Social Security number during the grantor’s life, but once the grantor dies and the trust continues, the successor trustee has to obtain a new EIN.10eCFR. 26 CFR 301.6109-1 – Identifying Numbers An irrevocable non-grantor trust generally needs its own EIN from the start.
Trustees also owe beneficiaries regular financial accountings, at least annually in most states, showing income received, expenses paid, and distributions made. Many states let beneficiaries request a detailed statement of all trust property at any time. Thorough records protect the trustee from personal liability claims and give beneficiaries the transparency they need. A beneficiary who suspects mismanagement can petition a court for a full accounting or, in serious cases, seek the trustee’s removal.
Most trusts also name a successor trustee, someone who takes over if the original trustee dies, resigns, or becomes incapacitated. If the document doesn’t name one and the beneficiaries can’t agree, a court will appoint someone, which costs time and money. Naming successors in the original document avoids that.