By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
The different types of trusts come down to three questions: can you change it (revocable or irrevocable), when does it start (during your life or at death, under your will), and who pays tax on its income (you, as a grantor trust, or the trust itself). Most California and Washington families with young children need one trust first: a revocable living trust that holds the house and brokerage accounts and creates a separate trust for each child if both parents die. Irrevocable trusts, such as a life insurance trust or a spousal lifetime access trust, come later and only when there is a specific tax or control problem to solve.
The three questions that sort every trust
- Revocable or irrevocable. A revocable trust can be changed or cancelled at any time. You keep full control, and the assets are still yours for estate tax and creditor purposes. An irrevocable trust is generally permanent. You give up control, which is the price of moving assets out of your taxable estate.
- Living or testamentary. A living (inter vivos) trust exists now and holds assets now. A testamentary trust is written into your will and only comes into being after death, which means the assets go through probate first.
- Grantor or non-grantor. If the trust is a grantor trust, you report its income on your own return. If it is a non-grantor trust, it files its own return and pays its own tax. Trusts have compressed brackets: a non-grantor trust reaches the top 37% federal rate at a small fraction of the income a married couple needs (see the estates and trusts table in IRS Rev. Proc. 2025-32).
Common types of family trusts compared
| Trust | Revocable? | What it does | Who typically needs it |
|---|---|---|---|
| Revocable living trust | Yes | Avoids probate on assets titled to it, keeps the estate private, names a successor trustee if you are incapacitated | Nearly every CA homeowner family; most WA families with real estate or minor children |
| Children’s (minor’s) trust | Usually created inside the living trust or will | Holds a child’s inheritance and releases it at ages you choose, such as 25, 30 and 35 | Any parent of a child under 18 |
| Testamentary trust | Set up by will | Same goals as a children’s trust, but only after probate | Families with few assets outside retirement accounts |
| Irrevocable life insurance trust (ILIT) | No | Owns term or permanent policies so the death benefit stays out of the insured’s estate | WA families near the state estate tax exclusion; very large estates federally |
| Credit shelter (bypass) trust | Becomes irrevocable at the first death | Locks in the first spouse’s exclusion and keeps later growth out of the survivor’s estate | WA married couples with estates above the state exclusion |
| Spousal lifetime access trust (SLAT) | No | Moves assets out of the giving spouse’s estate while the other spouse can still benefit from them | Families expecting estates well above $15,000,000 per person |
| Intentionally defective grantor trust (IDGT) | No | Removed from the estate, but you pay its income tax, which shifts more value to the kids | Owners of fast-growing assets; see the disadvantages of IDGTs |
| Qualified personal residence trust (QPRT) | No | Passes a home to the kids after a term of years; the gift is valued at a discount when the trust is set up | Older owners of high-value homes; compare personal residence trust vs QPRT |
| Special needs trust | Either | Provides for a disabled child without disqualifying them from means-tested benefits | Any family with a child who may need lifetime support |
| Charitable remainder trust | No | Pays you an income stream, then the remainder goes to charity | Families with large concentrated gains and a real giving goal |
“Spendthrift” is not a separate type. It is a clause in almost any trust that stops a beneficiary from pledging or assigning their share, which also protects it from most of their creditors.
Why the revocable living trust comes first in California
California probate is slow, public and priced by statute. Under Probate Code §10800, the executor’s fee is 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000 and 1% of the next $9,000,000. The attorney’s fee under §10810 uses the same schedule. Both are measured on the appraised value of the estate “without reference to encumbrances,” so the mortgage does not reduce the fee.
Worked example: a Bay Area couple with two kids
Assumptions (illustrative): a couple in San Mateo, one a Genentech scientist and one a physician, earning $950,000 together. Children ages 3 and 6. A $2,600,000 home with a $1,200,000 mortgage, and $400,000 in a joint brokerage account. 401(k)s and life insurance pass by beneficiary designation and are left out.
- Probate estate at appraised value: $3,000,000 (the mortgage is ignored for fee purposes).
- Statutory executor fee: $4,000 + $3,000 + $16,000 + $20,000 = $43,000.
- Statutory attorney fee: another $43,000.
- Total statutory fees: $86,000, before court costs, appraisal fees or any extraordinary fees.
If the house and brokerage account are titled to a revocable living trust, the successor trustee manages them without a court case. The bigger benefit for parents of young children is what happens next. Without a trust, money left to a minor typically ends up in a court guardianship of the estate or a custodial (UTMA) account. In California a UTMA custodianship can be delayed only to 21 for a lifetime gift, or 25 if the transfer is made by will or trust (Probate Code §3920.5). A children’s trust inside the living trust can hold the money as long as you want, with a trustee you chose, under instructions you wrote. See what happens to a UTMA when the child turns 21 for the custodial alternative.
Washington: when an irrevocable trust starts to matter
Washington residents rarely worry about federal estate tax. For 2026 the federal basic exclusion is $15,000,000 per person (IRS), and a surviving spouse can generally elect to use the first spouse’s unused federal exclusion (portability). Washington’s own estate tax is the issue. The state exclusion is $3,000,000 for deaths from July 1 to December 31, 2026 ($3,076,000 for deaths January 1 to June 30, 2026), and for deaths on or after July 1, 2026 the rates run from 10% to 20% (WA DOR). Washington law does not have the federal portability provisions (WA DOR estate tax FAQ), so the first spouse’s state exclusion is lost unless the plan uses it.
Worked example: an Amazon household in Bellevue
Assumptions (illustrative): household income $1,600,000, children ages 2 and 5, net worth $7,000,000 (home, vested RSUs, 401(k)s), plus $4,000,000 of term life insurance owned by the insured spouses. Both spouses die after July 1, 2026, the second death shortly after the first. Deductions, debts and growth are ignored.
- Simple wills, everything to the survivor: gross estate at the second death about $11,000,000 ($7,000,000 plus the $4,000,000 death benefit). Amount above the $3,000,000 state exclusion: about $8,000,000, taxed at Washington’s 10% to 20% rates.
- Credit shelter trust plus ILIT: $3,000,000 goes into a credit shelter trust at the first death, using that spouse’s exclusion. The policies are owned by an ILIT from the start, so the $4,000,000 is outside both estates. The survivor’s estate is about $4,000,000, and only about $1,000,000 sits above the exclusion.
Moving an existing policy into an ILIT has a catch: if the insured dies within three years of the transfer, the death benefit is pulled back into the estate (IRC §2035(a); see also the Form 706 instructions). Having the trust apply for a new policy avoids this.
How trusts interact with taxes you already pay
- Revocable trusts change nothing on your income taxes. The trust uses your Social Security number while you are alive, and you report everything on your normal return. See do trusts have tax ID numbers.
- Community property keeps its basis advantage. California and Washington are community property states. When one spouse dies, both halves of community property generally get a new cost basis at fair market value (IRC §1014(b)(6); IRS Pub. 551). A well-drafted joint revocable trust preserves the community character of assets, so this benefit is not lost. Irrevocable gifts, by contrast, carry over your old basis.
- Gifts into irrevocable trusts use your exclusions. For 2026 the annual gift tax exclusion is $19,000 per recipient, and gifts above it use part of the $15,000,000 lifetime exclusion and require Form 709 (Rev. Proc. 2025-32). Gifts to a trust qualify for the annual exclusion only when beneficiaries have a present-interest right, which is why ILITs commonly include “Crummey” withdrawal notices.
- Retirement accounts do not go into the trust. You keep 401(k)s and IRAs in your own name and, where it fits, name the trust as a contingent beneficiary. Taxable brokerage accounts are different: they can be retitled to the trust or name it as transfer-on-death beneficiary; see naming a trust as beneficiary of a brokerage account.
Mistakes we see in trusts for families with young kids
- Signing the trust and never funding it. A house still titled in your names goes through probate even with a trust in the drawer. After a refinance, check that the lender did not move title out of the trust.
- Distributing everything at 18 or 21. Many template trusts hand over the full share at the age of majority. Staged distributions, with the trustee able to pay for education and health before then, are a common alternative.
- Naming one person for every role. The guardian who raises your kids does not have to be the trustee who manages the money. Splitting the roles adds a check.
- Ignoring the RSUs and the new house. Equity comp vests, homes change, a third child arrives. A trust drafted five years ago can name the wrong assets and the wrong people.
- Buying an irrevocable trust you do not need. A California family with a $5,000,000 estate is far below the federal exclusion and owes no state estate tax. Complexity has a cost: separate returns, trustee duties and lost flexibility.
What to write down for the trustee and the kids
A trust tells the trustee what they may do. It rarely tells them why. A one-to-two-page letter of wishes kept with the trust fills that gap: what you want the money to pay for (college, a first home, starting a practice), what you do not want it to replace (work, effort), and how you made the big decisions along the way. Kevin puts it this way: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” Revisit the letter whenever you update the trust. Our family governance work starts with exactly this document.
Frequently asked questions
What are the 3 main types of trusts?
People usually mean revocable living trusts, irrevocable trusts and testamentary trusts. A revocable living trust holds assets now and can be changed. An irrevocable trust is generally permanent and can move assets out of your estate. A testamentary trust is created by your will after death and passes through probate first. Most families with young children start with a revocable living trust that contains children’s sub-trusts.
Does a living trust protect assets from creditors or estate tax?
Not while you are alive. A revocable trust is treated as yours, so your creditors can reach it and its assets count in your estate. It avoids probate and provides for incapacity. Creditor protection and estate tax savings generally require an irrevocable trust, or protective provisions such as spendthrift clauses in the trusts your children receive after your death.
Do we need a trust if we rent and our savings are mostly in 401(k)s?
Possibly yes, for the children. Beneficiary designations keep retirement accounts out of probate, but naming minor children directly can force a court guardianship of the money. Naming a trust as contingent beneficiary lets a trustee you chose manage it on your terms. A trust that holds retirement money needs drafting that fits the inherited-account withdrawal rules.
Next step
List every asset you own and how it is titled: house, brokerage, RSU account, 401(k)s, life insurance, and the beneficiary on each. If the house is not in a trust or minor children are named directly anywhere, that is the first item to take to an estate attorney. If you want help mapping it first, our Tax & Wealth Assessment covers your estate plan alongside your taxes, or start with our questions to ask an attorney.
This is general education, and the right move depends on your family’s full picture.
Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.
Connect on LinkedIn → · About KevinThis is part of how we approach Estate Planning for high-income W-2 families at Bright Advisers.
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