Estate planning is about more than deciding who receives your assets when you pass away. It is about creating a smooth, thoughtful process that protects your loved ones and honors your wishes. As your wealth grows, a comprehensive estate plan becomes an essential part of preserving your legacy and passing it on to future generations or charities. While many people start with a simple will, a trust can be a powerful estate planning tool, offering greater control, privacy, and flexibility.
So what exactly is a trust, and how do you know if one belongs in your estate plan? Understanding how trusts work can help you determine whether this strategy supports your broader financial plan.
Understanding the basics of trusts
At its core, a trust is a legal arrangement involving three key parties. The person who creates the trust is known as the grantor (sometimes called the settlor). The trustee is the individual or institution responsible for managing the assets held in the trust according to its terms. The beneficiaries are the people or organizations who ultimately benefit from those assets.
When you establish a trust, you transfer legal ownership of selected assets — such as real estate, investment accounts, or business interests — into the trust. This results in two distinct and legally recognized ownership interests. The trustee owns the legal interest, which means the trustee is recognized as the legal owner of the trust assets. For example, if a house is owned in a trust, the trustee’s name will appear on the deed. The other ownership interest is the beneficial interest, which is owned by the beneficiary. Going back the house example, the beneficiary’s name will not appear on the deed, but the beneficiary is the holder of the rights to all the benefits of the trust, which the trustee is legally obligated to enforce. This structure allows for the ongoing management of trust assets if the grantor passes away or becomes incapacitated and provides detailed instructions for how and when your wealth is distributed after your passing.
Trusts are commonly used as part of a well-rounded estate planning strategy, particularly for families who want clarity, continuity, and efficiency in how their estate is handled.
Trusts generally fall into two main categories: revocable and irrevocable.
Revocable living trusts
A revocable living trust is a flexible estate planning tool that allows you to manage your assets during your lifetime and direct how they are distributed after your death. As the name suggests, you can amend or revoke the trust at any time, as long as you remain mentally capable.
In many cases, you may act as the grantor, trustee, and primary beneficiary while you are alive. This means you retain full control of the assets held in the trust and can manage them much as you did before. If you become unable to manage your affairs, a successor trustee you name can step in immediately, without the need for court involvement.
One of the most common reasons people choose a revocable living trust is probate avoidance. Probate is the court-supervised process of settling an estate, which can be public, time-consuming, and costly. Assets titled in a revocable trust pass directly to beneficiaries outside of probate, helping maintain privacy and accelerate distribution. This can be especially useful if you own property in more than one state, as a trust may help you avoid multiple probate proceedings.
Irrevocable trusts
Unlike a revocable trust, an irrevocable trust generally cannot be easily changed or revoked once it is established. When you transfer assets into an irrevocable trust, you relinquish direct control and ownership of those assets. While this tradeoff may feel burdensome, it comes with significant potential benefits, particularly for high-net-worth individuals seeking advanced wealth transfer strategies.
There are many types of irrevocable trusts, and the taxation and asset protection features of an irrevocable trust depend on how the trust is drafted. Assets owned by certain types of irrevocable trusts are excluded from the grantor’s gross estate for federal estate tax purposes, while other types of irrevocable trusts result in the assets being included in the estate. Similarly, irrevocable trusts can be drafted so that the trust assets are treated as owned by the grantor for federal income tax purposes, or the trust can be drafted so that it is recognized as a separate taxpayer that files its own return and pays its own taxes. Because the assets in an irrevocable trust are no longer considered part of your personal estate, they may be shielded from potential creditor claims and lawsuits. Furthermore, removing these assets from your taxable estate can help reduce or eliminate estate taxes, allowing you to pass more of your wealth to your heirs or chosen charities.
When do you need a trust
Whether a trust belongs in your estate plan depends on your assets, family situation, and long-term goals. A will may be sufficient for some, but a trust may be worth considering if any of the following resonate with you.
You want to avoid probate and maintain privacy: If privacy and efficiency matter to you, a revocable living trust may help keep your estate details out of the public record. This can reduce administrative delays and the burden placed on your family during a difficult time.
You want more control over how and when assets are distributed: Unlike a will, which typically transfers assets outright, a trust allows you to set conditions. If you have minor children, or if you are concerned about an adult beneficiary’s ability to manage a large inheritance, a trust allows you to set specific conditions for distribution. For example, you can instruct the trustee to distribute funds only for education or healthcare, or you can stagger distributions so the beneficiary receives portions of the inheritance at specific ages (e.g., age 25, 30, and 35).
You are planning for estate taxes: For individuals and families with significant wealth, estate taxes can take a substantial portion of the assets left to heirs. Certain irrevocable trusts, such as Spousal Lifetime Access Trusts (SLATs), Grantor Retained Annuity Trusts (GRATs), or Irrevocable Life Insurance Trusts (ILITs), can be employed to transfer wealth out of your taxable estate while still providing for your spouse or descendants. These strategies seek to leverage your lifetime gift and estate tax exemptions efficiently.
You want to protect assets from potential creditors: Professionals in high-liability fields, such as physicians or business owners, may use irrevocable trusts to help shield personal wealth from potential litigation. By placing assets in an irrevocable trust, those assets are generally no longer considered your personal property and may be protected from future creditor claims.
You have a blended family or special needs dependent: If you have children from a previous marriage, a trust can help ensure that your current spouse is provided for during their lifetime, while preserving the remaining principal for your children after your spouse passes away. Additionally, if you have a dependent with special needs, a Special Needs Trust (SNT) can provide financial support for their supplemental care without jeopardizing their eligibility for means-tested government benefits like Medicaid.
You want your estate plan to work seamlessly with your financial plan: If your wealth strategy includes coordinated investment management, tax planning, retirement income planning, or charitable giving, a trust can help ensure those strategies continue smoothly. Rather than standing alone, the trust becomes part of an integrated financial plan.
Integrating trusts into your comprehensive wealth plan
A trust is not a standalone solution; it is a component of a comprehensive financial plan. To function properly, it must be funded, meaning legal title to your assets must be officially retitled into the trust. An unfunded trust cannot perform its intended function.
It is also important to review your estate plan regularly. Changes in tax laws, family dynamics, or financial goals may require updates to ensure everything remains aligned.
While an attorney drafts the legal documents, a fiduciary financial advisor plays a critical role in making sure the trust works as intended within your broader wealth management strategy. A coordinated approach can help align estate planning with investment management, tax-efficient strategies, and long-term legacy goals.
If you are a Mercer Advisors client and considering whether a trust is right for you, your advisor can help you evaluate your options and make informed decisions that support your family and your future.
Not a Mercer Advisors client but would like more information on a trust and how it fits into your financial plan?
FAQs
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A will is an important estate planning document, but it may not address every concern. A trust can help avoid probate, provide ongoing asset management if you become incapacitated, and offer more control over how assets are distributed. For families with growing wealth, a trust is often used alongside a will, not instead of one.
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A will takes effect only after death and typically goes through probate. A trust can be effective during your lifetime, manage assets if you become incapacitated, and distribute assets privately outside of probate. Both documents serve different purposes and are often used together in a comprehensive estate plan.
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Yes, assets that are properly titled in a trust generally avoid probate. This can save time, reduce costs, and keep your estate details private. Assets that are not transferred into the trust may still be subject to probate.
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Common assets placed in a trust include real estate, nonretirement investment accounts, business interests, and certain personal property. Retirement accounts are usually handled differently and often pass through beneficiary designations. Proper coordination is key to avoiding gaps or unintended consequences.
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No. While trusts are commonly associated with high-net-worth households, many families with $1.5 million or more in assets use trusts to manage complexity, protect privacy, and ensure their wishes are carried out. The decision depends more on goals and circumstances than on a specific net worth threshold.
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A revocable living trust can be amended or revoked during your lifetime as long as you are mentally competent. An irrevocable trust generally cannot be changed once established, which is why it is typically used for more advanced or long-term planning strategies.
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If you establish a revocable living trust, you generally retain complete control over your assets during your lifetime. You can act as the trustee, manage your investments, spend your money, and even revoke the trust entirely. However, if you create an irrevocable trust, you do give up direct control and ownership of the assets in exchange for potential tax and asset protection benefits.
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A trust does not entirely replace a will. Most comprehensive estate plans that utilize a revocable living trust also include a “pour-over will.” This document acts as a safety net, ensuring that any assets you accidentally left out of your trust during your lifetime are transferred into the trust upon your passing.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Hypothetical examples are for illustrative purposes only.
