Revocable vs. Irrevocable Trusts
A trust is an important estate planning document that can help an individual accomplish a vast array of different estate planning objectives. Due to the inherent complexity of these documents people looking to create an estate plan often have questions regarding the difference in various forms of trusts, and what type of trust would best suit their needs. This article will explain the difference in common forms of trusts, the goals that they seek to achieve, and situations in which they may be beneficial for you.
1. What is a Trust
On the most basic level a trust is an agreement between two or more parties to divide the interest in property amongst them in a fiduciary way. The person creating the trust, the "Grantor", transfers ownership of certain property to a third party, the "Trustee". The transfer of this property is subject to a "Trust Agreement". This Trust Agreement will detail how the trustee is to manage the property and how the property is to be invested, cared for, as well as various other duties the Grantor may request of the Trustee. The Trustee is bound by the terms of this agreement, and must manage the property in a fiduciary capacity on behalf of the "Beneficiaries", who are the people who will receive the benefits of the property. These agreements will direct how the property will be distributed amongst the Beneficiaries similar to a will.
2. Revocable Trusts and Their Purposes
A Revocable Trust is typically a trust in which the Grantor of the trust retains the ability to terminate the trust, alter the terms of the trust, or alter the beneficiaries of the trust. Typically this will be accomplished by naming the Grantor the Trustee and the lifetime Beneficiary of the Trust. The main advantage of these trusts is that the Grantor will retain the power to alter their estate plan more easily, by changing the Beneficiaries of the trust, removing or adding property to the trust, or terminating the trust as a whole, while still enjoying beneficial interest of the items within the trust during their lifetime.
The main advantage to this type of Trust is that upon the passing of the Grantor, the Trust will become irrevocable, and a successor Trustee will be named by the agreement. This allows the Grantor's estate to remove the items in the trust from the probate process, saving the estate money on attorneys fees and allowing for greater efficiency in distributing the assets. Furthermore, this structures makes the distribution of the assets the responsibility of a fiduciary trustee, who can also be directed to hold the assets, manage the assets, or delay distributions should the Grantor not want certain distributions of property to be made immediately. These trusts are a common planning tool that anyone looking to make an estate plan should consider.
3. Irrevocable Trusts and Their Purposes
Irrevocable Trusts are less common than Revocable Trusts, but can be drafted to serve a wide variety of different estate planning objectives. Unlike a Revocable Trust, Irrevocable Trusts require the the grantor relinquish the ability to revoke or substantially alter the trust. These documents will name a third party to be the Trustee of the trust. Grantors of an Irrevocable Trust can name individuals to serve in this capacity, however there are companies called "Trust Companies" that can be named to serve as a "Corporate Trustee". Additionally, many banks have trust departments dedicated to serving as Corporate Trustee for these trusts. Corporate Trustees can be beneficial for Irrevocable Trusts, particularly ones containing large amounts of assets, as they have departments dedicated to managing the assets of the underlying trusts, something that may be difficult for an untrained individual. In south Dakota, Grantors typically have further options to name additional advisors such as Trust Protectors, Distribution Advisors, Investment Advisors, and Distribution Committees. These roles allow for greater flexibility in planning and allows Grantor's to retain advisors they already may know or trust for various purposes.
There are various benefits to Irrevocable trusts, but one of the main advantages to a South Dakota Irrevocable trust is that they provide creditor protection benefits. Because the Grantor of these trusts no longer has unfettered beneficial interest in the assets of the trust, under various circumstances creditors of the grantor will not be able to access the assets of the trust. South Dakota's trust laws are unique in the fact that a grantor can also be a beneficiary of an Irrevocable Trust and still retain creditor protection as long as the Grantor uses a Corporate Trustee, and the assets are held in trust for a certain period of time. There are caveats to this protection however, so it is important to work with a South Dakota attorney in drafting an Irrevocable Trust for this purpose. These benefits have made South Dakota a premier trust jurisdiction world wide.
Based on various factors these trusts will either be taxed by the federal government as a separate entity making a trust a "non-grantor trust", or will be disregarded for tax purposes and the income of the trust will be taxed as if it were the grantor's own income, making the trust a "grantor trust". The terms of the trust will determine the tax status of the trust. It is important that individuals utilizing this type of trust work with attorneys to achieve there goals in creating these trusts, as improperly executed documents can have various unexpected and undesirable tax implications.
Conclusion
Almost any estate plan can benefit from the use of a properly drafted trust. By working with an attorney individuals can achieve a large range of estate planning objectives with more flexibility than is typically available with a simple will. These benefits can help save your estate money, give you greater control over the distribution of your assets, protect your assets from creditors, and help preserve your legacy. Should you have any questions about adding a trust to your estate plan, please feel free to schedule a free consultation today!