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Estate Planning 201: How Revocable and Irrevocable Trusts Can Impact Your Assets

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Lisa Richmond-Kirby

Lisa Richmond-Kirby

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Trusts can be excellent estate planning vehicles, but they are not one-size-fits-all. The type of trust you need depends on what you want to accomplish. Common examples of things you can manage with a trust include spousal protection, wealth preservation, or tax efficiency. 

Regardless of the specific trust you need, they all fall into one of two general categories—revocable or irrevocable. This article will look at the differences and discuss how to know which one is best for your estate.

5 Fundamental Benefits of Trusts

It is understandable and prudent to want to protect your heirs and the assets you leave them. Trusts are a powerful way to ensure that loved ones are protected because the Grantor (person who created the trust) can control when and why the trust distributes assets to the beneficiaries. 

That means the grantor can establish trust terms to distribute assets in the most beneficial way to provide the most significant value. This could be in the form of restricting distributions until their loved ones reach a certain age or achieve specific education goals to ensure that the assets aren’t accessible until the heir can handle them responsibly. 

Using a trust to control asset distribution is also a great way to pass assets to your heirs with the greatest tax efficiency and ensure that the assets are available to provide ongoing support.

A trust will generally keep assets out of probate, which can be a significant source of stress, time, and cost. The assets can also be managed professionally through the use of a corporate trustee

To recap, trusts offer several advantages, including:

  • Controlled vehicle for passing down wealth. 
  • Ability to set specific distribution terms and parameters. 
  • Promote tax efficiency for your estate. 
  • Opt for a professionally managed trust via a corporate trustee
  • Most trusts avoid probate. 

What's a Revocable Trust and Why Consider One?

The critical aspect of a revocable trust is that it allows the grantor to alter the terms of the trust at any time before their death. 

This means the grantor has the flexibility to add or remove beneficiaries, change the stipulations for distributions, remove property from the trust, or even outright cancel the trust.

Placing assets in a revocable trust often gives the grantor a feeling that they have a preview into how events will transpire at their death. This can be incredibly helpful because it provides the grantor flexibility to tweak the trust terms if they recognize potential issues they had’nt thought  of before. 

A revocable trust becomes irrevocable when the grantor passes, and then the terms of the trust which were in place at the time of the grantor's death become permanent terms of the trust. Assets in a revocable trust are also shielded from probate since they are beneficiary designated— meaning they will pass directly to the named beneficiary.

What's an Irrevocable Trust and Why Consider One?

Signed, sealed, delivered, it’s yours! Unlike revocable trusts, an irrevocable trust is permanent. It can be challenging to amend an irrevocable trust in many states once the grantor signs the trust agreement and funds the trust. 

The tradeoff is that the grantor gains tax efficiency in exchange for giving up control of the assets placed in the irrevocable trust. They won’t have to individually pay the taxes on the income produced by the assets, and those assets are no longer included in their taxable estate as well.

South Dakota, however, is a friendly state for creating irrevocable trusts. The state laws concerning the amendment of irrevocable trusts are very flexible, and it is not uncommon to alter the terms of irrevocable trusts. This can happen by restating the terms or through a process called decanting, in which some of the trust's assets are moved into a new trust. 

Which Type of Trust Is Right For You?

To get "more bang for your buck," it is often recommended that you pull a team together to discuss which type of trust is right for you before a trust agreement is drafted and executed. 

Many grantors like to bring their estate planning attorney, accountant, and their (current or future) trust officer all together to determine which trust might work best to meet their goals and issues.

Asking yourself a few questions will help you and your team form a plan to best accomplish what you want:

1. Do you want to retain ownership of your assets?

2. Do you want your trust to have a charitable component?

3. Are you concerned about creditors?

4. Would you like to receive income from the trust while alive?

5. Are estate taxes top of mind?

Discussing these questions and others with your team can help you carefully define your goals and ensure that you have the best trust structure and terms to accomplish them.

First Dakota Wealth & Trust Can Help

First Dakota National Bank has provided banking services for 149 years, and they have also officered Wealth & Trust Department services for 93 years. We are here to share our experience and knowledge with you!!

Contact us today to discuss your desires for your estate, and we will work with you to help you meet your goals in the most effective way possible.

Disclaimer

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department or its employees provides tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.