A trust is a legal entity that holds assets — money, property, stocks, bonds, insurance policies or artwork — for the benefit of another. Trusts help you accomplish your estate planning goals; their power lies in their versatility.

A trust can help protect assets and reduce tax obligations, letting you manage your finances in an effective way. When you create and fund a trust, you are known as the grantor and you can name the people you want as beneficiaries — those who will benefit from the trust.

For the trust to generate income, you may want to use income-producing securities such as bonds. If you’re looking for a pool of cash, accessible to pay estate taxes due at your death or to provide for your family, you may fund the trust with a life insurance policy.

Now come the details: There are two basic types of trusts, living trusts and testamentary trusts. A living trust is set up during the person’s lifetime. A testamentary trust is set up in a will and established only after the person’s death, when the will goes into effect. Living trusts can be either “revocable” or “irrevocable.”

Revocable trusts allow you to retain control of all the assets in the trust; you are free to revoke or change the terms of the trust at any time. They are useful in avoiding probate — they are ways to ensure that all or some of your property passes directly to your heirs without going through probate court. A revocable trust is not an asset-protection technique, as assets transferred to the trust during the grantor’s lifetime will remain available to creditors. But your creditors must petition a court to get at the assets held in the trust. A revocable trust evolves into an irrevocable trust on your death.

In irrevocable trusts, the assets are no longer yours, and typically you can’t make changes without the beneficiary’s consent. But the appreciated assets in the trust aren’t subject to estate taxes.

Within these broad categories are a variety of trusts that can serve different purposes:

Credit shelter trust: Also called a bypass or family trust, you write a will bequeathing an amount to the trust, up to but not exceeding the estate-tax exemption. Then you pass the rest of your estate to your spouse, tax-free. And there’s an added bonus: once money is placed in a bypass trust, it is forever free of estate tax, even if it grows.

Generation-skipping trust: Also called a dynasty trust, it allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior —typically your grandchildren.

Qualified personal residence trust: This type of trust can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.

Irrevocable life insurance trust: This trust can remove your life insurance from your taxable estate, help pay estate costs and provide your heirs with cash for a variety of purposes. To do this, you surrender ownership rights, which means you may no longer borrow against that policy or change beneficiaries. In return, the proceeds from the policy may be used to pay any estate costs after you die, and provide your beneficiaries with tax-free income.

Qualified terminable interest property trust: If you’re part of a family in which there have been divorces, remarriages and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property trust. Your surviving spouse will receive income from the trust, and the beneficiaries you specify (e.g., your children from a first marriage) will get the principal or remainder after your spouse dies.

Charitable trust: This type of trust benefits a particular charity or the public in general, and is established to lower or avoid estate or gift taxes.

Charitable remainder trust: This can be funded during the grantor’s lifetime and can be used as a financial planning tool, providing lifetime benefits. It rewards both your altruism and desire for public honor when you’re named by the organization that receives the benefits.

Special needs trust: Permitted under Social Security rules, this trust allows the beneficiary to continue to receive government benefits. By establishing this trust, the trust’s benefits will not decrease other distributions.

A trust lets you safely give money or property to other people — and in a way that helps you maintain control of your assets — while indirectly helping your beneficiaries. At the same time, you can plan so that you can avoid estate and/or income taxes and probate expenses, and still maintain your privacy.