Trusts and structures explained: family trust, revocable and irrevocable trust, testamentary, dynasty, foundation

• A trust separates legal ownership (the trustee) from benefit (the beneficiaries) under rules written by the person who set it up (the settlor); nobody in a discretionary trust has a fixed entitlement.

• The United States uses trusts mainly to avoid probate and to plan estate tax; Australia and New Zealand use the discretionary family trust as the everyday vehicle for family and business assets; the United Kingdom taxes most family trusts on entry, every ten years and on exit under the relevant-property regime.

• A trust deed carries control. The letter of wishes, a single non-binding page, is the only document in the structure that carries the settlor's reasons.

A trust is an arrangement in which one person or company, the trustee, holds assets for the benefit of others, the beneficiaries, under the terms of a deed written by the person who put the assets in, the settlor. The trustee owns the assets in law and is bound to use them as the deed says. Nothing is filed with a court to create one in most countries, which is why families can build them privately and why they outlast the people who made them.

Four roles appear in almost every trust. The settlor gives. The trustee holds and decides. The beneficiaries receive. A protector, where one is appointed, watches the trustee and can replace them. The deed is the constitution; the letter of wishes is the settlor's voice inside it. An appointor, in Australian deeds, holds the power to hire and fire the trustee, and is often the most important role in the structure and the least understood: whoever holds it controls the trust, and it passes under the appointor's will or the deed's default, which is where family trusts are most often lost.

A will passes assets at death, once, to named people who then own them outright. A trust holds assets for as long as the deed says, under conditions, with someone else deciding. Most families need the will; some need the trust as well.

Revocable living trust (United States)

You control it, can change it, and it becomes irrevocable when you die. Its job is to keep assets out of probate and off the public record. It gives no tax advantage: the assets are still in your estate, and the trust is ignored for income tax while you live. Most American estate plans above modest size have one, with a pour-over will to catch anything left outside it, and the commonest failure is the house or the brokerage account that was never actually retitled into the trust.

Discretionary or family trust (Australia, New Zealand, United Kingdom)

The trustee decides which of a class of beneficiaries receives income or capital, and when. The everyday Australian vehicle for family investments and businesses, because income can be streamed to the family member taxed at the lowest rate and assets are held for the family rather than by any member. Undistributed income is taxed to the trustee at the top marginal rate, which is why distributions are resolved every June. The trust usually cannot last more than eighty years (South Australia has no limit). In the United Kingdom the same structure sits inside the relevant-property regime: a 20% charge on assets settled above the nil-rate band, a periodic charge of up to 6% every ten years, exit charges in between, and income and gains taxed at trust rates. British families use it for control and protection rather than tax.

Testamentary trust

Created by a will, born at death. Australians use it widely because income paid to minor children from a testamentary trust is taxed at adult rates rather than the penal minors' rates, which turns school fees into a tax-efficient distribution; families everywhere use it for control over young, vulnerable or spendthrift heirs and for protection from a beneficiary's divorce or bankruptcy. It costs nothing until it starts, and the will can leave the beneficiary the choice of whether to use it.

Irrevocable trust and the ILIT (United States)

Assets given away for good, out of the estate for tax. The gift uses lifetime exemption; the growth after the gift is outside the estate forever. The irrevocable life insurance trust owns a policy so the payout lands outside the taxable estate, often to pay the tax on everything else; a policy transferred into it within three years of death is pulled back into the estate under section 2035, which is why the trust should buy the policy rather than receive it. Once made, the settlor cannot take it back.

Dynasty and generation-skipping trusts (United States)

Built to last generations in states that have abolished the old rule against perpetuities (South Dakota, Delaware, Nevada, Alaska, Wyoming among them), using the generation-skipping transfer exemption, US$15 million per person from 2026, so the tax is paid once rather than at every death. Only makes sense above the exemption, and only with a family that can govern a structure its founder will never see the end of.

Grantor trusts, GRATs and the estate freeze

The American tools for moving growth out of the estate before a sale: the grantor retained annuity trust, which passes the growth above a fixed rate to heirs with little or no gift; the intentionally defective grantor trust, which buys assets from the founder on an instalment note; and their Canadian cousin, the estate freeze, which converts the founder's common shares to fixed-value preferred shares so the growth accrues to new common shares held by a family trust. High-net-worth estate planning places them in the twelve months before a sale.

Bare, protective and special-needs trusts

A bare trust holds for one person absolutely, a placeholder. A protective trust guards a beneficiary from themselves or their creditors. A special-needs trust (US), special disability trust (AU) or disabled person's trust (UK) supports someone with a disability without disqualifying them from public benefits: a supplemental needs trust in the United States keeps Medicaid and SSI; an Australian special disability trust shelters up to a capped amount from the pension assets test; a UK disabled person's trust escapes the relevant-property charges.

Alter-ego and joint-partner trusts (Canada)

For settlors over sixty-five: assets roll in at cost, no deemed disposition on the way in, the settlor keeps the income for life, and the assets pass outside the will and outside probate at death. The Canadian answer to the American revocable trust, with the twenty-one-year deemed disposition rule suspended until the settlor's death.

Civil-law countries built other vessels for the same jobs. The private foundation (Liechtenstein, Panama, Austria's Privatstiftung, Germany's Familienstiftung) is a legal person with no owners that holds assets for a purpose or a family; it is the trust's cousin where the trust does not exist, and Germany taxes it as if a new generation inherited every thirty years. Singapore's variable capital company and private trust companies serve family offices. Brazil and Mexico use the fideicomiso, a contract-based trust. Holding companies do part of the job everywhere and none of the protective part. A family choosing between them is really choosing which country's courts it wants to answer to.

A person you trust who will outlive the job, a company you control, or a professional who charges. The individual trustee is cheap and dies; the corporate trustee owned by the family is the Australian standard and puts the real control in whoever holds the shares and the appointor's power; the professional trustee is expensive, impartial, and the right answer when the beneficiaries do not get on. Two trustees are safer than one; a protector with the power to replace them is safer still. And every trustee, whoever they are, will one day be asked what the settlor would have wanted, and will have only the deed and the letter.

A discretionary trust gives the trustee the power to choose. The deed says what the trustee may do; it never says what the settlor would have done. The letter of wishes fills that gap: a private, non-binding note to the trustees about who should come first, what the money is for, what would worry the settlor. Good trustees rarely depart from it. Most trusts do not have one, and the ones that do are usually a page written once and never updated. It is also a page. Everything the settlor would have said across a table, in the case the letter did not foresee, is not in it. What trustees actually need from you shows a worked example.

1. Protect young, vulnerable or exposed heirs: testamentary, protective or special-needs trust.

2. Control a business or a home across generations: discretionary or family trust with a protector, or a foundation in civil-law countries.

3. Tax: only ever with an adviser in your country; the same structure is a benefit in one country and a charge in the next, and a trust that was efficient when the family lived in Sydney is a reporting liability when a child moves to Paris.

4. Privacy: a trust in most countries, a revocable trust in the United States.

5. Care for a spouse and then the children: life-interest or testamentary trust, and a letter of wishes.