How Trusts Work: The Complete Guide to Estate Planning With Trusts

Prince Died With No Will or Trust—His Estate Cost $10 Million to Settle

When musician Prince Rogers Nelson died in April 2016 without a will or trust, his $156 million estate entered a Minnesota probate proceeding that dragged on for six years. Attorney fees, administrator fees, creditor claims, and federal and state estate taxes consumed an estimated $10 million—with tens of millions more going to distant relatives he likely never intended to inherit. His estate could have passed to chosen beneficiaries efficiently, privately, and without court oversight for attorney fees of perhaps $5,000–$20,000 in trust setup costs. Trusts are not only for billionaires.

What a Trust Is

A trust is a legal arrangement in which one person (the grantor, also called settlor or trustor) transfers assets to a trustee who manages them for the benefit of one or more beneficiaries according to the terms of the trust document. Three roles are always present:

• Grantor: The person who creates and funds the trust
• Trustee: The person or institution managing the assets (often the grantor during their lifetime for revocable trusts)
• Beneficiary: The person or entity who benefits from the trust

One person can hold all three roles simultaneously in a revocable living trust during the grantor's lifetime.

Revocable vs. Irrevocable: The Core Distinction

Common Trust Types

Revocable Living Trust: The workhorse of estate planning. Assets transferred into the trust pass directly to beneficiaries at the grantor's death, bypassing probate entirely. The grantor retains full control and can change or revoke the trust at any time. Funded properly, it eliminates the need for probate in most states. California estates over $184,500 (2024 threshold) benefit enormously from this structure.

Testamentary Trust: Created inside a will and comes into existence only at death. Goes through probate before being established. Useful for controlling distributions to minor children or spendthrift beneficiaries without the upfront cost of a living trust.

Irrevocable Life Insurance Trust (ILIT): Holds a life insurance policy outside the grantor's estate, removing the death benefit from estate tax calculation. With the 2026 estate tax exemption potentially dropping from $13.6 million to ~$7 million per person, this trust type is becoming more relevant to more families.

Special Needs Trust (SNT): Holds assets for a beneficiary with disabilities without disqualifying them from means-tested benefits like SSI and Medicaid. Without an SNT, an inheritance can disqualify someone with disabilities from essential government benefits.

Charitable Remainder Trust (CRT): Provides income to the grantor or beneficiaries for a term, then transfers remainder to a charity. Grantor receives an immediate partial charitable deduction while deferring capital gains on appreciated assets transferred in.

The Funding Problem

A trust document alone does nothing. Assets must be transferred—or funded—into the trust to avoid probate and take advantage of the trust's terms. This requires:

• Retitling real estate via a new deed showing the trust as owner
• Changing ownership on bank and investment accounts to the trust
• Updating beneficiary designations on retirement accounts and life insurance to name the trust where appropriate

Studies suggest that 30%–50% of people who establish living trusts fail to fund them properly. An unfunded trust fails to avoid probate and defeats its primary purpose.

Trust Costs

Disclaimer: Trust law is highly state-specific and depends heavily on individual circumstances. This article is for informational purposes only. Consult a licensed estate planning attorney for guidance tailored to your estate.