Which Personal Trust Is Right for You?

• Personal trusts generally fall into two categories: revocable trusts, which offer flexibility and control, and irrevocable trusts, which may support estate, tax, charitable, and wealth transfer planning objectives.
• Different trust structures, including SLATs, ILITs, GRATs, QTIPs, CRTs, CLTs, and QPRTs, are designed to address specific family, charitable, business, and legacy planning goals.
• Choosing the right trust depends on your unique objectives, assets, and family circumstances, making coordination with legal, tax, and financial advisors an important part of the planning process.

A trust can help you transfer wealth, provide for loved ones, and support broader estate planning goals. Because different trusts serve different purposes, understanding the options can help you determine which structure may best fit your needs.

Trusts generally fall into two broad categories: revocable and irrevocable. The key difference is the level of control you retain—and the potential planning benefits each structure may provide.

A revocable trust may be a flexible option if you want to maintain control over your assets while creating a plan for how they should be managed or distributed. While you are living and competent, you can change or revoke the trust, and you generally may withdraw principal or income as needed. Although a revocable trust does not offer current income tax advantages, it may provide continuity by allowing a successor trustee to manage trust assets if you become incapacitated.

An irrevocable trust generally requires you to give up the ability to change or revoke the trust, with the trustee responsible for managing the assets according to the trust terms. While that loss of flexibility is an important tradeoff, it may also create planning opportunities, including the potential to reduce estate taxes, protect certain assets, or support specific family and charitable goals. Several common types of irrevocable trusts are outlined below.

Irrevocable trusts can be structured in different ways depending on your goals, such as providing for family, supporting charitable giving, managing life insurance, or transferring appreciating assets. Below are several common types to consider.

For married couples, a spousal lifetime access trust, or SLAT, may help you use some or all of your lifetime federal gift and estate tax exemption while still providing financial support for your spouse. With this type of irrevocable trust, you create the trust and name your spouse as a permitted beneficiary, giving your family indirect access to the trust assets through your spouse.

In some cases, you and your spouse may each consider creating a SLAT for the other. This approach requires careful drafting by your own attorney because the trusts must be meaningfully different from one another. If they are treated as “reciprocal trusts,” the assets could be included in each grantor’s estate, reducing or eliminating the intended tax benefits.

An irrevocable life insurance trust, or ILIT, may help keep life insurance proceeds outside of your taxable estate. You transfer ownership of the policy to the trust, and when you pass away, the proceeds are held in trust for your beneficiaries rather than paid directly into your estate. This can create a source of liquidity to help cover estate taxes, expenses, or other family needs. In exchange, you must give up control of the policy, including the ability to change beneficiaries or cancel the coverage, but doing so may provide meaningful estate tax benefits.

Assets that you expect to appreciate—such as stock in a closely held business—may be well suited for a grantor retained annuity trust, or GRAT. With a GRAT, you transfer the asset to an irrevocable trust and receive an annual payment, or annuity, for a set number of years. The annuity amount is based on the trust terms, the value of the property transferred, and current interest rates.

When you outlive the GRAT term and the trust is administered properly, any income or appreciation above the stated interest rate can pass to your remainder beneficiaries—often children or family trusts—free of additional gift or estate tax. However, a GRAT is most effective when the trust assets grow as expected, and you must survive the annuity term for the strategy to achieve its intended benefit.

A qualified terminable interest property trust, or QTIP, can help you provide for your spouse while still deciding how remaining assets will be distributed after your spouse’s death. This type of trust can be especially helpful if you have concerns about future family changes, such as remarriage, blended-family dynamics, or other life events that could affect your long-term wishes.

With a QTIP trust, your spouse generally must receive income from the trust, but access to principal can be limited. Your spouse also does not control who ultimately receives the remaining trust assets. That allows you to support your spouse during life while preserving your ability to direct what happens to the assets in the future.

When charitable giving is an important part of your wealth plan, a charitable lead trust, or CLT, may allow you to support one or more charities now while ultimately transferring remaining assets to your family or other beneficiaries. You make an irrevocable gift to the trust during your lifetime, and the trust pays income to the charitable beneficiaries for a set term. When that term ends, any remaining trust assets pass to the beneficiaries you have chosen.

When properly structured and administered, a CLT may help freeze the value of the transferred assets for gift and estate tax purposes, so appreciation above that value may pass without additional transfer tax. However, the assets available for your remainder beneficiaries may decline over time, and a CLT may not be the best choice if using your generation-skipping transfer tax exemption is one of your planning goals.

Appreciated assets can sometimes support both charitable and income planning goals through a charitable remainder trust, or CRT. You make an irrevocable gift to the trust during your lifetime, and you may be eligible for an immediate income tax deduction based on the value of the charity’s future interest. The trust then pays income to you or other named beneficiaries for life or for a set number of years, with the remaining assets passing to the charity you have designated when the trust ends.

Because CRTs must meet strict IRS requirements for charitable trusts, this strategy requires careful structuring and administration. It is also important to understand that when the trust terminates, the remaining balance must pass to charity rather than to your heirs or other noncharitable beneficiaries.

A primary or vacation home may be transferred through a qualified personal residence trust, or QPRT, in a tax-efficient way. With a QPRT, you place the residence in an irrevocable trust while retaining the right to live in the home for a set number of years. If you outlive that term, the residence can pass outright to your beneficiaries or remain in trust for their benefit, potentially removing the home’s value from your taxable estate at a discounted gift tax value. However, you must survive the trust term for the strategy to achieve its intended estate tax benefit.

Choosing the right trust starts with clarifying what you want to accomplish—whether that means maintaining flexibility, reducing potential estate taxes, providing for family, supporting charitable goals, or transferring specific assets. Because each trust involves different benefits, tradeoffs, and requirements, working with your legal, tax, and financial advisors can help you determine which structure best aligns with your broader wealth plan.

A qualified terminable interest property trust, or QTIP, can help you provide for your spouse while still deciding how remaining assets will be distributed after your spouse’s death. This type of trust can be especially helpful if you have concerns about future family changes, such as remarriage, blended-family dynamics, or other life events that could affect your long-term wishes.

With a QTIP trust, your spouse generally must receive income from the trust, but access to principal can be limited. Your spouse also does not control who ultimately receives the remaining trust assets. That allows you to support your spouse during life while preserving your ability to direct what happens to the assets in the future.

Choosing the right trust is only one part of a comprehensive estate plan. Explore our Trust & Estate Services to help you navigate wealth transfer, fiduciary, and estate planning considerations that are aligned with your broader wealth plan.

This article is for information purposes only and is not intended to provide financial, tax, legal, accounting, investment, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. There is no assurance that any investment, financial, or estate planning strategy will be successful.

Investing involves risks, and you may incur a profit or a loss.

Wilmington Trust is not authorized to and does not provide legal, accounting or tax advice. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor.

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