Revocable Trust vs Irrevocable Trust – Wisconsin

As you plan for the future, a trust can be a useful step for many Wisconsin residents in managing their estate. Trusts (and wills) give you control over how your property is handled and allow you to pass it on to your beneficiaries according to your wishes.

If having a trust becomes part of your planning, you may find yourself deciding between a revocable living trust and an irrevocable trust. Understanding their core differences will help you make the right choice. This post will break down those differences, focusing on how Wisconsin laws shape your options.

What is a Trust?

A trust is a legal method for organizing your assets during your lifetime. It specifies how your assets will be distributed after you’ve passed away. As the grantor, you create the trust by placing chosen assets into it, thereby transferring their management to a trustee. This trustee, who could be a person you know and trust, or a financial entity, is responsible for handling the assets according to your instructions.

The terms of the trust determine the distribution of assets to beneficiaries, either while you’re alive or after your passing. Many people choose trusts as part of their estate planning because they offer a way to bypass the lengthy and often public probate process, while still retaining control over how their assets are managed and dispersed.

Revocable Trusts

A revocable trust is a legal arrangement that gives the grantor the ability to set up a trust during their lifetime, with the option to change or revoke it as they see fit. Known commonly as a revocable living trust, this tool allows you to manage and adjust the terms of the trust, such as who benefits from it, what assets are included, and how those assets are handled, all while you’re still alive.

Advantages of a Revocable Trust

Maintains Control: Revocable trusts allow you to adjust the terms, contribute assets, and remove assets. Should things change, you can even revoke the trust completely. This ongoing flexibility is invaluable for adapting to life’s unexpected developments.

Flexible to Emergencies: If you ever become unable to manage your own financial matters, a revocable trust allows you to designate someone you trust to take over the management of your assets. This can be done without the need for court intervention, providing a seamless transition and comfort knowing your personal wishes will be carried out.

Simplifies Estate Handling: Establishing a revocable trust can significantly ease the process of managing your estate after you pass away. By sidestepping probate, inheritances can reach your beneficiaries swiftly, without the lengthy delays often associated with probate proceedings. Additionally, the contents of the trust remain private, protecting your financial affairs from public scrutiny.

Disadvantages of a Revocable Trust

Exposure to Creditors: Because you maintain ownership of the assets in a revocable trust, they remain accessible to creditors. This means that if you have outstanding debts, your creditors could potentially go after the assets in the trust to satisfy those obligations.

No Estate Tax Advantages: One of the limitations of a revocable trust is that it doesn’t offer any tax benefits. The assets within the trust are still considered part of your taxable estate, meaning they are subject to estate taxes just like any other assets you own.

Potential Costs and Administrative Burden: While setting up a revocable trust can simplify estate management, it can also involve certain costs and administrative tasks. For example, transferring real estate or other significant assets into the trust may require legal assistance and additional fees. Additionally, maintaining the trust may involve ongoing paperwork and legal considerations.

Irrevocable Trusts

Irrevocable trusts, once created, cannot be easily changed or undone. Unlike a revocable living trust, where you retain the ability to modify the terms of the trust or even revoke it entirely, an irrevocable trust requires you to permanently hand over control of the assets placed into it. This arrangement is often chosen by those who want to protect their assets from creditors or reduce the amount of estate tax owed after death.

Advantages of an Irrevocable Trust

Creditor Protection: Placing assets into an irrevocable trust removes them from your estate, shielding them from creditors’ claims. This makes irrevocable trusts appealing to those who want to safeguard their wealth from potential legal challenges or unpaid debts.

Reduction of Estate Taxes: Establishing an irrevocable trust can be an effective way to lower estate taxes. By moving assets into this trust, they are removed from your taxable estate, which can significantly lessen or even eliminate the tax burden on your heirs. This approach is particularly useful for those with considerable wealth who want to ensure that as much of it as possible is passed down to future generations.

Medicaid and Long-Term Care Planning: For individuals worried about the expenses associated with long-term care, an irrevocable trust can be a tool. By placing assets into the trust, you may become eligible for Medicaid and other government assistance programs without needing to exhaust your personal savings, thereby safeguarding your wealth for your family’s future. This type of planning has mixed reviews from legal and financial professionals. The disadvantages may outweigh the advantages and careful consideration is advised.

Disadvantages of an Irrevocable Trust

Limited Access to Assets: A key drawback of an irrevocable trust is the loss of access to the assets you transfer into it. Once the trust is established, you cannot easily modify, revoke, or access those assets without the approval of the beneficiaries and potentially the court, making it crucial to be certain of your decisions when creating the trust.

Complexity and Expense: Setting up an irrevocable trust can be a more complex process compared to its revocable counterpart. It can also be quite expensive. It often requires the expertise of an experienced attorney to navigate the intricate legal and tax issues involved, and the ongoing management of the trust may involve separate tax filings and other administrative tasks.

Difficulty in Making Changes: Once established, an irrevocable trust is difficult to alter or dissolve. To make changes, you usually need the consent of all beneficiaries and possibly a court order, making the process cumbersome and time-consuming.

Legal and Tax Considerations for Revocable and Irrevocable Trusts in Wisconsin

When creating a trust in Wisconsin, it’s important to understand both the legal requirements and potential tax implications. Whether you’re setting up a revocable or irrevocable trust, how state laws apply to your situation is a key consideration:

Wisconsin Revocable Trust Regulations: In Wisconsin, a revocable trust gives the grantor ongoing control over their assets, with the option to adjust or dissolve the trust at any point while they’re alive. Typically, trusts are assumed to be revocable unless it’s specifically noted otherwise. After the grantor passes away, the trust typically turns into an irrevocable one. The trustee then steps in to manage the assets as outlined in the trust. While these trusts don’t shield assets from creditors or reduce estate taxes, they do skip the probate process, leading to a quicker and more private asset distribution. Furthermore, any leftover assets can be moved into the trust after the grantor’s death through the use of a “pour-over” will.¹

Wisconsin Irrevocable Trust Regulations: In Wisconsin, once assets are placed in an irrevocable trust, they generally cannot be altered or withdrawn. This provides strong protection from creditors, as the assets are no longer considered part of the grantor’s personal estate. These assets also avoid probate, keeping details private and reducing federal estate taxes. Trustees managing these trusts are legally required to act in the best interest of the beneficiaries and are held accountable for their actions, with federal gift taxes applying to gifts over $1 million.²

Tax Considerations: While Wisconsin doesn’t have a state estate tax, federal estate taxes may still apply, depending on the size of your estate. Moving assets into an irrevocable trust can help reduce your taxable estate, potentially lowering federal tax liabilities. As of 2024, trusts cap out at an income tax rate of 37%.³

Seek Expert Guidance: Both financial advisors and estate planning attorneys play crucial roles in setting up a trust that aligns with your goals. While an estate planning attorney ensures your trust meets all legal requirements, a financial advisor can help you understand the financial implications and make strategic decisions that benefit your overall financial plan. Working together, they can provide a comprehensive approach to your estate planning needs.

Please Note: Our experienced financial advisory team can collaborate with your attorney to help set up the trust that’s right for you. If you don’t have an attorney, we can recommend one from our vetted professional network to ensure you receive the expert guidance you need.

Common Myths and Misconceptions of Irrevocable Trusts and Revocable Trusts

There are several common misunderstandings surrounding revocable living trusts and irrevocable trusts, which can lead to confusion when planning an estate. It’s important to address these to make informed choices:

A Revocable Trust Protects Assets from Creditors: Some people believe that assets placed in a revocable trust are immune from creditor claims. However, since the grantor retains ownership and control over these assets during their lifetime, they remain accessible to creditors if financial issues arise.

Irrevocable Trusts Can Never Be Adjusted: While it’s true that irrevocable trusts are designed to be permanent, it’s not entirely accurate to say they can never be altered. In certain situations, such as with the consent of all beneficiaries or through a court ruling, changes may be made. However, these instances are rare and often complex.

Trusts Are Only Necessary for the Wealthy: Another widespread belief is that trusts are only beneficial for individuals with substantial wealth. In reality, trusts can serve as an effective estate planning tool for a wide range of people, offering benefits like avoiding the probate process and ensuring assets are distributed according to your wishes. Consulting with an estate planning attorney will help you decide whether a trust would be beneficial or if a will is sufficient.

How to Set Up a Trust in Wisconsin

Establishing a trust in Wisconsin involves several steps that require thoughtful consideration to meet your estate planning goals effectively. Here’s a simplified guide to walk you through the process:

Step 1) Identify Your Objectives: Begin by clearly understanding what you want to achieve with your trust. Whether it’s to avoid probate, protect assets, or ensure a smooth transfer to beneficiaries, your goals will determine whether you should opt for a revocable living trust or an irrevocable trust.

Step 2) Select the Appropriate Trust Type: Your objectives will guide you in choosing between a revocable trust, which allows changes during your lifetime, or an irrevocable trust, which is more rigid but offers stronger asset protection.

Step 3) Choose a Trustee: Decide who will be responsible for managing the trust. You can serve as the trustee or appoint someone you trust—whether it’s a family member, friend, or professional—to oversee the trust’s assets and ensure your wishes are carried out.

Step 4) Prepare the Trust Agreement: Partner with a skilled estate planning attorney to develop a thorough trust document. This agreement will define all the details of the trust, ensuring it adheres to Wisconsin’s legal standards.

Step 5) Fund the Trust: Finally, to activate the trust, you’ll need to transfer your assets into it. This includes transferring ownership of properties, financial accounts, or any other significant assets into the trust.

Our Advisors Can Help You Find The Trust That’s Right For You!

Choosing between a revocable living trust and an irrevocable trust is an important decision in planning your estate. A revocable trust provides flexibility, allowing you to modify your estate plan as your needs evolve, while an irrevocable trust offers enhanced protection for your assets and potential tax benefits, though it requires more permanent commitments.

Our team of financial advisors is here to guide you through these choices, ensuring that your financial plan reflects your goals and provides for your loved ones. We work closely with you to understand your unique circumstances and recommend the best approach for your estate planning needs.

Additionally, if you need legal assistance, we can connect you with a trusted estate planning attorney from our professional network. To discuss your options and create a plan tailored to your needs, schedule an appointment with our team. We’re committed to helping you secure your financial future.

Citations:

1. https://www.wisbar.org/forPublic/INeedInformation/Pages/Revocable-Living-Trusts.aspx#:~:text=In%20Wisconsin%2C%20a%20trust%20is,person%20who%20creates%20the%20trust.
2. https://www.oflaherty-law.com/learn-about-law/irrevocable-trust-for-wisconsin-estate-tax#:~:text=According%20to%20Wisconsin%20law%2C%20if,funds%20held%20in%20the%20trust.
3. https://www.irs.gov/pub/irs-pdf/f1041es.pdf