There are several types of trust documents. They differ in their goals and when each type is used.
Most trusts used in the U.S. are called revocable or living trusts. They're used to do estate planning. The goals are both tax related and non-tax related. See here for pros and cons of the revocable trust.
Another type of trust is called the irrevocable trust. While you can change a revocable trust, it is more difficult to change the terms of the irrevocable trust.
The greater difficulty with changing it also provides some advantages in the right situation. Generally an irrevocable trust is considered separate from its maker for some purposes.
So, after you create an irrevocable trust, the increase in the value of the trust assets are not considered owned by the trust maker. If the trust maker has substantial assets already, an irrevocable trust can keep the increase in the trust value out of the maker's taxable estate.
So, this can lower estate taxes. However, many states have very high limits before they estate tax you.
So irrevocable trusts are used less often than revocable trusts.
Sometimes an irrevocable trust will be used to expedite the granting of government benefits - due to their separate legal existence for many purposes.
Can't change the terms but they can be
more flexible than you expect
An irrevocable trust is irrevocable in the sense that you cannot change it after you've signed the document. The difference between an irrevocable trust and a Massachusetts revocable living trust is that you can change the revocable living trust at a later date after signing.
An irrevocable trust can reduce both income and estate taxes. After you sign an irrevocable trust (IT), the assets are no longer considered owned by you. So if the asset grows in size after you part company with it, the growth is not in your taxable estate.
Making your estate 'smaller' can lead to lower estate taxes. Massachusetts levies an estate tax on people who die with at least $1 Million, unless they're married or leave the excess over that amount to charity.
So, if you create an irrevocable trust before you die, the amount in the IT is not part of your Massachusetts estate and your estate tax bill is lower, or made to disappear.
You can also use an IT to lower income taxes. A trust is subject to high income tax rates, but if the income is distributed to a beneficiary, then that income is taxed at the beneficiary's income tax rate.
So, if the beneficiary’s income tax rate is lower than the trust creator's rate then income taxes will have been reduced.
Many government programs will give you money if your assets or income are low. Chief among these 'needs based' programs is MassHealth. It is also known as Medicaid, a program started in the 1960s under President Johnson.
Medicaid is intended to help those person with very low assets levels ($2,000) to get assistance in paying for nursing home costs. Because there are so many individuals who are living to ripe ages in the U.S. these days, the need for nursing home care is exploding. And the care is expensive - up to $15,000 per month in urban areas like NYC and Boston.
A person can create an irrevocable trust and keep the right to its income while giving up the right to use its principal. This 'income only trust' can help expedite getting MassHealth IF the transfer of assets to the trust occurs ahead of time enough. This time period is 5 years before application (and nursing home entrance).