Richard English, Managing Director, Commerce Family Office, Kansas City
Trusts are integral to many estate plans. Understanding the fundamentals of how different trust structures work and the advantages a trust may provide will help you make informed decisions about how to use a trust to structure your estate plan.
When a bank or trust company such as Commerce Trust is appointed to fulfill the responsibilities of a trustee, the company acts in the role of corporate trustee. Having a reliable corporate trustee in place brings experience and oversight that can help maintain compliance with the various rules governing trustees.
Definition of trust elements
Trust
A trust is a legal arrangement in which a person transfers assets to a trustee, to be held and used for the benefit of one or more beneficiaries.
Trust Document
Typically, a trust is governed by a trust agreement in the case of an “inter vivos trust,” also known as a living trust, or by a will in the case of a “testamentary trust.” An inter vivos trust is created during the grantor’s life, while a testamentary trust is established when the testator or author of the will passes away. In either case, the trust’s governing document will set forth essential instructions to the trustee regarding the use of trust assets for the beneficiaries. The governing document may also include provisions governing the selection of successor trustees and the ultimate termination of the trust.
Grantor (a.k.a. Settlor)
In the case of an inter vivos trust, the person creating the trust is typically referred to as the “grantor” or “settlor.” In the case of a testamentary trust, the person creating the trust is the “testator.” Typically, it is the grantor or the testator whose assets are used to fund the trust.
Trustee
Each trust has one or more trustees. A trustee can be an individual or a corporate entity with trust powers, such as a bank or trust company, or occasionally a charitable institution such as a university. In some cases, the grantor and the initial trustee are the same person. This is often the case with a “revocable trust” or “living trust.” With many other trusts, the grantor and the initial trustee are not the same individual. Among other things, trustees are responsible for holding title to the trust’s assets, investing them in an appropriate manner, and using them for the benefit of the trust’s beneficiaries as provided in the governing document.
Beneficiary(ies)
Each trust has one or more beneficiaries who are eligible to receive distributions or otherwise benefit from the trust. Typically, the beneficiaries are individuals, but charitable organizations can also be beneficiaries of a trust. In many cases, the trustees and the beneficiaries are different, but in some situations, one or more of the beneficiaries may also act as trustee(s).
Advantages of trusts
Providing structure for estate planning
A trust can be an essential component of a complex estate plan. Trusts in general offer the grantor the opportunity to establish a customized plan for distributing the income and principal of the trust among the grantor’s chosen beneficiaries in the manner and timeframe selected by the grantor.
Trusts can also play a pivotal role in providing for minors or those otherwise unable to manage assets on their own. In the case of a minor, the trustee can use the trust assets for the minor’s benefit until the minor reaches an age that the grantor deems appropriate for the trust to terminate. At that point, the trustee will distribute the assets to the beneficiary. In the case of an adult with disabilities, the trustee can use the trust assets for that person’s benefit for life.
A revocable trust can be an effective vehicle for managing the grantor’s wealth during incapacity. It can also provide a means for avoiding probate at the grantor’s death. In addition, a well-written trust will include detailed trustee succession provisions, naming future trustees when the initial trustee becomes unable or unwilling to continue serving and even including provisions for changing trustees or selecting a successor when there is no named trustee to act.
Allowing for customization
Within some limits, the document governing a trust can be customized to address the grantor’s specific goals and the needs and circumstances of the beneficiaries. Some trusts include incentives designed to encourage certain behaviors or achievements. Others give the trustee broad discretion to make distributions to the beneficiaries under certain conditions.
As long as the terms of the trust do not violate public policy and adhere to applicable laws, trusts afford those who create them an abundance of flexibility regarding how, when, and to whom assets are distributed.
Avoiding probate and preserving privacy
Generally, assets held in an inter vivos trust are not subject to probate at the death of the grantor. Probate is the process of settling a person’s estate through a court proceeding and distributing assets to the beneficiaries of the estate. Because probate filings are usually available to the public, avoiding probate can preserve privacy for the grantor and the beneficiaries.
Using a testamentary trust, one governed by a will, does not avoid probate. In these cases, the testator’s will and estate would be subject to probate at his or her death before the assets are turned over to the trustee. However, in most states, once the estate is closed and the trust is funded, there would be no ongoing supervision by the probate court.
The privacy associated with avoiding probate can be particularly important for high-profile individuals or those who value keeping their finances undisclosed to outside parties.
Facilitating tax planning
Trusts serve a variety of purposes when it comes to planning for tax reduction. From a traditional estate planning standpoint, trusts can be used to reduce and defer the impact of transfer taxes like the estate, gift, and generation-skipping transfer taxes. For example, certain trusts can help a married couple make more effective use of each spouse’s exemptions from federal estate, gift, and generation-skipping transfer taxes, potentially preserving more wealth for beneficiaries by reducing exposure to transfer taxes. In some cases, trusts can also be used to minimize income and capital gains taxes.
Protecting assets
In most cases, the assets of an irrevocable trust established by someone other than the beneficiary will be protected from the claims of the beneficiary’s creditors. This can be an important factor in designing a trust for the benefit of an individual beneficiary who might have more potential exposure to creditors, such as medical professionals or others in fields with heightened malpractice concerns, business owners who may have potential liability on loan guarantees, or a beneficiary with irresponsible spending habits.
Similarly, and with certain exceptions, assets held in an irrevocable trust may also be protected from legal claims by a beneficiary’s spouse in the event of a divorce. In the case of a revocable trust, because of the grantor’s retained right to revoke or terminate the trust, assets held in the trust are generally not protected from the claims of the grantor’s creditors.
Structuring a trust to align with your goals
It is crucial to consider your goals and the intended outcomes when drafting your trust, whether that may be preserving assets for future generations, providing for a surviving spouse and children, supporting charitable causes, or reducing estate tax exposure. Different trusts have certain advantages and disadvantages depending on how the trust is structured and what provisions are included in the trust document. The following are a few common ways trusts can be customized to fit individual needs.
Revocable or living trusts
Revocable trusts, also known as living trusts, offer grantors flexibility for changing goals or dynamic life circumstances while still avoiding probate. A revocable trust allows the grantor to make changes or, as the name implies, revoke or terminate the trust during the grantor’s life as desired.
Assets in a revocable trust are generally not subject to probate at the grantor’s death. However, assets in a revocable trust will be included in the grantor’s estate for estate tax purposes.
Irrevocable trusts
As a general matter, trusts are either revocable or irrevocable. With a revocable trust, the grantor usually retains the right to revoke the trust or amend the governing trust agreement. With an irrevocable trust, the grantor generally waives these rights.
Irrevocable trusts can serve a variety of purposes, such as making a lifetime gift that benefits certain individuals or charities, or taking advantage of specific tax benefits. Some of these purposes can only be realized through the use of an irrevocable trust because of the need for the grantor to release ownership of the trust assets. For example, an irrevocable life insurance trust can keep insurance proceeds out of the grantor’s taxable estate because the insured grantor gives up ownership of the policy.
As the name suggests, an irrevocable trust is generally irrevocable and unamendable except in specific circumstances. Accordingly, careful consideration is recommended for those interested in creating an irrevocable trust.
Grantor trusts
The term “grantor trust” is broadly used to describe a trust for which the grantor is treated as the “owner” of all income tax liabilities. As a result, the grantor is generally responsible for paying all income taxes and capital gains taxes associated with the trust’s investments. In contrast, the tax responsibility associated with a “non-grantor trust” is typically borne by either the trust or its beneficiaries rather than the grantor.
Revocable trusts are usually treated as grantor trusts for income tax purposes. An irrevocable trust may also be treated as a grantor trust, depending on how the irrevocable trust is structured and what, if any, rights the grantor has retained.
While on the surface it may not seem appealing to be taxed on the income of a trust, a grantor trust can provide meaningful benefits in the effort to transfer wealth to the next generation. When the grantor, rather than the trust, pays a tax liability, the value of the assets held in trust can be preserved to the benefit of the beneficiaries without involving a taxable gift situation.
Distribution provisions
The distribution provisions of a trust will be outlined in the trust document. In designing a trust, the grantor can prescribe the conditions under which distributions can be made to the beneficiaries. Such conditions can apply separately to the net income generated by the trust and the principal value of the assets held in the trust.
A trust may contain mandatory distribution provisions, such as a trust directing the trustee to terminate the trust and distribute all remaining principal when the beneficiary reaches certain ages. For example, a trust might direct partial distributions at ages 30 and 35, with a final distribution at age 40.
A trust can also be set up to give a beneficiary certain rights of withdrawal, which give a beneficiary the ability to take assets out of the trust under specific circumstances. For example, a trust might empower a beneficiary to withdraw a certain dollar amount or percentage of the principal balance each year.
In some cases, the grantor will require that all net income be distributed to one or more beneficiaries, while in others the grantor may empower the trustee to exercise discretion in deciding when to distribute net income, if at all. The grantor may provide that any undistributed income be added to the principal of the trust.
The trustee may also be permitted to distribute a portion of the principal of the trust to meet a beneficiary’s needs. These provisions typically provide the trustee with a certain amount of discretion in determining whether to do so. A common standard is to allow the trustee to distribute principal as the trustee deems necessary for a beneficiary’s health, education, maintenance, and support.
Charitable trusts
Several types of irrevocable trusts can be established to benefit charity. Some trusts are set up exclusively for charitable beneficiaries, while others can have beneficiaries that are both individual and charitable organizations.
A trust that is established exclusively for the benefit of charitable organizations is often classified as a private foundation. Private foundations enjoy certain tax benefits, such as avoiding most of the tax that would otherwise be imposed on earned income and realized capital gains. It is important to note that private foundations are still subject to a 1.39% excise tax on net investment income. In addition, within certain limitations, private foundation donors can generally claim an income tax deduction for their donation, an additional tax benefit that may encourage charitable giving.
A trust that is established for the benefit of both charitable organizations and individuals is often referred to as a “split-interest” trust. One common example of a split-interest trust is a charitable remainder trust (CRT). Typically, a charitable remainder trust will make regular payments to one or more individuals for a set period, at the end of which, the remaining assets in the trust will be distributed to one or more charitable organizations. Another common example of a split-interest trust is the charitable lead trust (CLT), in which regular payments are first made to the charitable organization(s) for some time. At the end of that payment period, the assets remaining in the charitable lead trust will be distributed to one or more individuals.
Charitable trusts can generate a positive philanthropic impact long after the grantor has passed away. Because of the technical nature of these trusts, it is important to understand the potential benefits and risks of these estate planning tools before implementing one of them.
A donor-advised fund (DAF), though not a trust, is an alternative vehicle for pursuing charitable goals. Donor-advised funds are accounts held at a DAF-sponsoring organization. Donors contribute assets to the account and are generally eligible for a corresponding tax deduction (assuming they itemize their deductions). Assets in the fund can typically be invested for potential growth tax-free before they are distributed to qualified charities of the donor’s choosing.
Navigating trust options for your estate plan
Trusts are a versatile wealth planning tool that can serve as a cornerstone of a comprehensive estate plan. At Commerce Trust, your private wealth management team of experienced advisors will engage with you to gain a deep understanding of your personal and wealth transfer goals then collaborate with your estate attorney and accountant to help build and implement a plan aligned with your goals.
Contact Commerce Trust today to experience a different approach to private wealth management that can help you secure your legacy.
The opinions and other information in the commentary are provided as of June 16, 2026. This summary is intended to provide general information only, and may be of value to the reader and audience.
Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against all risk.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.
Commerce Trust does not provide tax advice to customers unless engaged to do so. Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.
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