Quick Answer
A revocable trust avoids probate but keeps assets in the grantor's taxable estate, and the grantor pays the income tax. A completed transfer to a properly structured irrevocable trust may reduce the taxable estate, but retained powers, trust terms, and applicable law control the result, and the grantor gives up control. Living (inter vivos) trusts avoid probate; testamentary trusts, created through a will, go through probate.
Trusts and wills are the primary tools for directing how assets are managed and distributed. The exam tests basic trust concepts, key trust types, and the difference between dying with and without a will.
How Do Revocable and Irrevocable Trusts Compare?
| Feature | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Grantor control | Full (can modify or terminate) | None (cannot be changed, with limited exceptions) |
| Probate | Avoided | Avoided |
| Income tax benefit | None (grantor pays tax) | Possible (trust is separate entity) |
| Estate tax benefit | None (assets included in estate) | May reduce the taxable estate, depending on retained powers, trust terms, and applicable law |
| Asset protection | None (creditors can reach assets) | Depends on trust terms and applicable law |
Exam Tip: Gotchas
- Revocable trust = probate avoidance, no tax benefit. The grantor still pays income tax and the assets remain in the taxable estate.
- Irrevocable trust = grantor gives up control. It cannot be changed or revoked once established, with limited exceptions. A completed transfer to a properly structured irrevocable trust may reduce the taxable estate, but retained powers, trust terms, and applicable law control the result.
What Terms Do You Need to Know for Trusts?
| Term | Definition |
|---|---|
| Grantor (settlor/trustor) | Person who creates and funds the trust |
| Trustee | Fiduciary who manages trust assets according to the trust document |
| Beneficiary | Person(s) who receive benefits from the trust |
| Corpus (principal) | The assets held in the trust |
| Trust document (indenture) | Legal agreement governing the trust's terms |
What Is a Revocable Living Trust?
- Grantor can modify, amend, or revoke at any time during their lifetime
- Assets remain part of the grantor's taxable estate (no estate tax benefit)
- Income is taxed to the grantor (grantor trust)
- Primary benefit: avoids probate; assets pass directly to beneficiaries
- Grantor typically is the trustee during their lifetime
- Becomes irrevocable upon the grantor's death
Think of it this way: A revocable living trust is like a container you fully control while alive. You can add to it, take from it, or dissolve it. At death, the container locks and assets pass directly to beneficiaries, skipping the probate process entirely.
What Is an Irrevocable Trust?
- Cannot be changed or revoked once established (with limited exceptions)
- A completed transfer to a properly structured irrevocable trust may reduce the taxable estate, but retained powers, trust terms, and applicable law control the result
- Trust is a separate tax entity: the trust pays taxes on income, or beneficiaries pay tax on distributions received
- Grantor gives up control of the assets
- Used for estate tax reduction and charitable planning
How Do Inter Vivos and Testamentary Trusts Differ?
| Type | When created | Probate |
|---|---|---|
| Inter vivos (living trust) | During the grantor's lifetime | Avoids probate |
| Testamentary trust | Created by the terms of a will, effective at death | Subject to probate (established through the will) |
Exam Tip: Gotchas
- Testamentary trusts go through probate. They are created through a will and therefore DO go through probate, even though they are trusts. Do not confuse them with living trusts, which avoid probate.
What Specialized Trusts Should You Recognize?
What Is a Bypass (Credit Shelter) Trust?
- Uses the deceased spouse's estate tax exemption to shelter assets from estate tax for the benefit of heirs (not the surviving spouse's estate)
Think of it this way: Without a bypass trust, the first spouse to die might leave everything to the survivor, effectively forfeiting the deceased spouse's estate tax exemption. The bypass trust preserves that exemption by funding a separate trust at the first death.
What Is a Generation-Skipping Trust?
- Transfers assets to grandchildren or later generations, potentially avoiding estate tax at the children's generation
What Is a Grantor Retained Annuity Trust (GRAT)?
- Grantor transfers assets to an irrevocable trust but retains annuity payments for a set term
- Remainder passes to beneficiaries at reduced gift tax cost
What Is a Charitable Remainder Trust (CRT)?
- Provides income to the donor (or other beneficiary) for a period, then the remainder goes to a charity
- Donor receives a partial income tax deduction
What Should You Know About Wills?
- A will (testament) is a legal document directing how a person's assets are distributed at death
- Assets passing through a will go through probate (court-supervised process)
- A person who dies with a valid will dies testate
- A person who dies without a valid will dies intestate; state law controls distribution
- Wills can be revoked or amended during the person's lifetime (via codicil or new will)
- A will does not control assets with beneficiary designations (retirement accounts, life insurance, transfer on death (TOD) / pay on death (POD)) or jointly held assets with survivorship rights
Exam Tip: Gotchas
- Testate vs intestate: Dying with a valid will = testate. Without = intestate (state law controls).
- Wills do NOT control beneficiary-designated assets. Retirement accounts, life insurance, TOD/POD designations, and jointly held assets with survivorship rights all pass outside the will.
How Do Trusts Show Up Across the Exam?
Trusts show up in three different angles on the Series 65, and the exam tests each independently:
- As estate planning vehicles (this page): revocable vs irrevocable structures, probate avoidance, and specialized trusts like bypass, GRAT, and CRT
- As client types (covered in the Client Types unit): when you advise a trust, you work with the trustee, whose investment authority is bounded by the trust document
- As tax entities (covered in the Tax Considerations unit): the trust pays taxes on income, or beneficiaries pay tax on distributions received
A trust's structure drives both its tax treatment and how an adviser handles it as a client. Same trust, three lenses.
Where Is Estate and Gift Tax Covered?
Estate and gift tax mechanics are covered in the Tax Considerations unit. The annual gift tax exclusion, lifetime unified exemption, portability / DSUE election on Form 706, and the 40% estate tax rate all live there. Refer to that unit for thresholds and mechanics; the ownership and trust structures above are the vehicles those rules act on.
What Should You Check on Exam Day?
- Remember a revocable trust avoids probate but gives no tax benefit; assets stay in the taxable estate and the grantor pays the income tax.
- Remember an irrevocable trust cannot be changed or revoked once established, with limited exceptions, and the grantor gives up control; a completed transfer to a properly structured irrevocable trust may reduce the taxable estate, but retained powers, trust terms, and applicable law control the result.
- Distinguish inter vivos (living) trusts, which avoid probate, from testamentary trusts, which are created through a will and go through probate.
- Distinguish testate (died with a valid will) from intestate (died without one, so state law controls).
- Remember a will does not control assets with beneficiary designations or jointly held assets with survivorship rights.
- Recognize the specialized trusts by purpose: bypass/credit shelter shelters the deceased spouse's exemption, generation-skipping targets grandchildren or later generations, a GRAT retains annuity payments for the grantor, and a CRT pays income to the donor before the remainder goes to charity.