A trust is one of the most practical tools in estate planning. At its core, it’s a legal arrangement where you transfer ownership of assets to the trust, which then holds and distributes them according to your instructions, either during your lifetime, at death, or both.
People use trusts for many reasons: skipping probate, protecting a beneficiary who can’t manage money, reducing estate taxes, supporting a loved one with disabilities without affecting their government benefits, or keeping family financial affairs private.
But not all trusts work the same way. Each type is built for a specific purpose, and choosing the wrong one can leave important goals unmet. This guide walks through the main types of trusts used in New Jersey estate planning, what each one does, and when it makes sense.
The Foundation: Revocable vs. Irrevocable Trusts
Every trust falls into one of two categories, and this distinction shapes everything else.
Revocable trusts can be changed, amended, or dissolved at any point during your lifetime. You remain in control. Because you never fully give up ownership, these trusts don’t provide creditor protection or estate tax savings, but they’re excellent for probate avoidance, privacy, and incapacity planning.
Irrevocable trusts generally cannot be undone once created. That loss of control is the point. By legally removing assets from your personal ownership, an irrevocable trust can reduce estate taxes, protect assets from creditors, and create long-term structures your family can rely on for years.
Most of the trusts described below are variations of one or the other.
Revocable Living Trust
A revocable living trust is the most widely used estate planning trust. You create it during your lifetime, transfer assets into it, and typically serve as your own trustee. You stay in full control.
When you die, the trust transfers assets directly to your beneficiaries, no court, no probate, no public record. A successor trustee steps in to carry out your instructions.
A revocable living trust also works as an incapacity plan. If you become unable to manage your affairs, your successor trustee can act immediately without waiting for a court-appointed guardian.
Learn more: Should Your Estate Plan Include a Revocable Living Trust?
Irrevocable Trusts
An irrevocable trust removes assets from your estate permanently. This can accomplish things a revocable trust cannot:
- Reduce or eliminate federal estate tax exposure
- Shield assets from future creditors or lawsuits
- Qualify for Medicaid without spending down all assets
- Lock in a long-term financial structure for your family
Common irrevocable trust structures include asset protection trusts, income-only trusts, and irrevocable life insurance trusts (ILITs). Each one is designed for a different goal, so the right choice depends on your situation.
Learn more: New Jersey Irrevocable Trust Law: What You Need to Know
Irrevocable Income-Only Trusts
This structure is common in Medicaid planning. You transfer assets, often a home, into the trust and retain the right to income, but not the principal. After five years (the Medicaid lookback period), those assets are generally protected.
Learn more: Making the Most of Your Estate with Irrevocable Income-Only Trusts
Asset Protection Trusts
An asset protection trust is an irrevocable trust designed specifically to shield assets from future creditors, lawsuits, or long-term care costs. Professionals, business owners, and real estate holders often use these as a defensive planning measure.
Learn more: Asset Protection Trusts to Safeguard Your Wealth in New Jersey
Irrevocable Life Insurance Trusts (ILITs)
When you own a life insurance policy outright, the death benefit is included in your taxable estate. An ILIT removes that policy from your estate entirely. The trust owns and controls the policy, and proceeds pass to your beneficiaries free of estate tax.
Special Needs Trusts
A special needs trust (SNT) holds assets for a person with a disability without disqualifying them from Medicaid or Supplemental Security Income (SSI). If you gave a disabled family member money directly, it could interrupt their benefits. An SNT avoids that by holding the funds separately and paying for supplemental expenses, things like therapy, education, recreation, and transportation, that government programs don’t cover.
There are three main types:
Third-party special needs trusts are funded by someone other than the beneficiary, typically a parent or grandparent. There’s no Medicaid payback requirement when the beneficiary dies. This is the most common structure for parents planning for a child with disabilities.
First-party special needs trusts are funded with the beneficiary’s own assets, usually a personal injury settlement or inheritance. Federal law requires a Medicaid payback provision from any remaining funds at death.
Pooled special needs trusts are managed by nonprofit organizations and pool funds from multiple beneficiaries for investment purposes, while maintaining separate accounts for each. They’re especially useful when a private trust would be too costly to administer.
Learn more:
- Special Needs Trust Overview
- Third-Party Special Needs Trusts for NJ Parents
- First-Party Special Needs Trusts in New Jersey
- Pooled Special Needs Trusts in New Jersey
Bypass Trusts and Marital Trusts
Married couples often use a combination of bypass trusts and marital trusts to reduce estate taxes across both deaths.
A bypass trust (also called a credit shelter trust) is funded at the death of the first spouse. The surviving spouse may receive income from the trust, but the principal passes to the next generation outside the surviving spouse’s taxable estate, sheltering it from estate tax on the second death.
A marital trust (including QTIP trusts) supports the surviving spouse while preserving your control over where the assets ultimately end up. This matters especially in blended families or second marriages, where you may want to provide for a surviving spouse while ensuring children from a prior relationship eventually inherit.
Learn more: Estate Planning for Second Marriages
Trusts for Tax Strategy and Generational Wealth Transfer
Several trusts are designed primarily to move wealth to the next generation while minimizing transfer taxes.
Grantor Retained Annuity Trusts (GRATs) let you transfer appreciating assets to heirs at reduced gift tax cost. You retain an annuity payment for a set term; anything above the IRS hurdle rate passes to beneficiaries tax-free.
Generation-Skipping Trusts (GST trusts) pass wealth directly to grandchildren or later generations, skipping over the children’s taxable estates.
Dynasty trusts protect assets across multiple generations by keeping wealth in trust long-term, beyond the normal distribution timeline.
Learn more: Trusts for Tax Planning in New Jersey
Charitable Trusts
Charitable trusts serve two purposes at once: supporting a cause you care about and providing financial or tax benefits to you or your heirs.
Charitable Remainder Trusts (CRTs) pay income to you or another beneficiary for a set period or for life. When that period ends, the remaining assets go to charity. A CRT can provide an income tax deduction upfront and spread capital gains on appreciated assets over time.
Charitable Lead Trusts (CLTs) work in reverse: charity receives income first, and your heirs receive the remaining assets afterward. These are often used to pass wealth to the next generation at a reduced gift or estate tax cost.
Learn more: Charitable Remainder Trust and the IRS
Trusts for Inheritance Control
Some families need more structure around how and when an inheritance is actually used. Several trust types address this directly.
Testamentary trusts are created through your will and take effect at death. They’re commonly used to hold assets for minor children until they reach a certain age.
Spendthrift trusts restrict a beneficiary’s ability to assign their interest or have it seized by creditors. If you’re worried about a beneficiary’s financial habits, a spendthrift provision offers real protection.
Discretionary trusts give the trustee authority to decide when and how much to distribute, based on the beneficiary’s needs and circumstances.
Children’s trusts hold assets for minor or young adult children under specific conditions, often releasing funds at milestone ages (25, 30, 35) rather than all at once.
Personal Residence Trusts
A Qualified Personal Residence Trust (QPRT) transfers your home out of your taxable estate at a reduced gift tax value. You retain the right to live there for a specified term; at the end of the term, the home passes to your heirs. If you outlive the term, the full value of the home is removed from your estate.
Learn more: QPRT vs. PRT: Which Personal Residence Trust Is Right for You?
Grantor vs. Non-Grantor Trusts
The tax treatment of a trust depends significantly on whether it’s a grantor trust or a non-grantor trust. In a grantor trust, you’re still treated as the owner for income tax purposes, which can be an advantage or a disadvantage depending on your goals. Non-grantor trusts file and pay taxes as a separate entity.
Learn more: Grantor vs. Non-Grantor Trusts: Which Is Best for Your Estate Plan?
Gun Trusts
A gun trust is a specialized revocable trust for owning and transferring firearms regulated under the National Firearms Act (NFA), such as suppressors, short-barreled rifles, and machine guns. It allows multiple co-trustees to legally possess the firearms, helps avoid probate delays on transfer, and ensures compliance with both federal and state law.
Without a gun trust, passing NFA-regulated firearms to heirs involves significant legal complexity. A gun trust simplifies the process considerably.
Totten Trusts / Payable-on-Death Accounts
A Totten trust (also called a payable-on-death or POD account) is not a formal trust in the traditional sense. It’s a bank or investment account with a named beneficiary. At death, funds transfer directly to that person, no probate required.
It’s a simple, low-cost tool for making sure a beneficiary has quick access to cash. It doesn’t replace a full estate plan, but it can be a practical piece of one.
What Assets Can Go Into a Trust?
Most major assets can be held in or transferred to a trust:
- Real estate (primary residence, rental property, vacation property)
- Bank accounts and investment portfolios
- Business interests
- Life insurance (through an ILIT)
- Personal property
- Firearms (through a gun trust)
Retirement accounts, IRAs, 401(k)s, generally remain in your own name, but a trust can sometimes be named as a beneficiary when appropriate.
Learn more: How to Fund a Trust in New Jersey | Pros and Cons of Putting Your Home in a Trust
How Trusts Help You Avoid Probate
Probate is the court process for validating a will and overseeing the distribution of your estate. It can take months or longer, costs money, and becomes public record.
Assets held in a properly funded trust avoid probate entirely. Your successor trustee can distribute assets quickly and privately, without court involvement.
The key word is funded. A trust only works if assets are actually transferred into it. A pour-over will acts as a safety net, it captures any assets you forgot to title into the trust and directs them there after death, though those assets would still go through probate first.
Learn more: Should I Have a Trust in My Estate Plan? | Should I Have a Trust or a Will?
When Does a Trust Make Sense?
A trust is worth considering if you:
- Want to avoid probate
- Own real estate, especially in multiple states
- Have minor children or a beneficiary who can’t manage money
- Have a family member with a disability who receives government benefits
- Have a blended family or a second marriage
- Own a business
- Have significant assets and want to reduce estate taxes
- Want to control how and when an inheritance is used, not just who gets it
Even people with modest estates often benefit from the structure and control a trust provides.
Working with an Estate Planning Attorney
There’s no single right trust for every family. The best structure depends on your goals, your assets, your family situation, and New Jersey law.
Benjamin D. Eckman has spent decades helping New Jersey families create estate plans that protect what they’ve built and provide clearly for the people they care about. If you’d like to understand which type of trust fits your situation, schedule a consultation today.
Frequently Asked Questions
What is a trust and how does it differ from a will?
A will directs how your assets are distributed after death, but it has to go through probate court first. A trust holds assets during your lifetime and transfers them at death without court involvement. Trusts also work while you’re alive, which a will does not.
What’s the difference between revocable and irrevocable trusts?
A revocable trust can be changed or cancelled at any time. It’s useful for probate avoidance and incapacity planning. An irrevocable trust generally cannot be changed once created. That permanence provides tax benefits, asset protection, and Medicaid planning advantages that a revocable trust can’t offer.
Can a trust protect assets from Medicaid?
Certain irrevocable trusts, particularly income-only trusts, can help protect assets from Medicaid’s spend-down requirements, provided they’re set up well before you need care. Timing matters significantly because of Medicaid’s five-year lookback period.
Do I still need a will if I have a trust?
Yes. A pour-over will capture any assets not titled into your trust and directs them there. It also names a guardian for minor children, which a trust cannot do.
What happens if I don’t fund my trust?
An unfunded trust doesn’t work. If assets aren’t transferred into the trust during your lifetime, they won’t pass through it at death. Proper funding is one of the most important, and most overlooked, steps in the process.
How do I get started?
Schedule a consultation with Benjamin D. Eckman to discuss your goals and determine which trust structure fits your situation.
