What is an Irrevocable Trust?
An irrevocable trust is a type of estate planning tool frequently used to pass wealth, such as property (real estate), investments, cash, and life insurance benefits onto beneficiaries without the need for probate or for transfer of those assets upon death. Although the grantor of an irrevocable trust can include instructions to the trustee that permit trust assets to be used to make payments of income or principal to the grantor even during the grantor’s lifetime, an irrevocable trust cannot be modified or terminated by the grantor. Thus, an irrevocable trust generally means that once the grantor instructs the trustee to transfer the trust assets to a named beneficiary , such direction cannot be reversed by the grantor.
Irrevocable trusts differ from revocable trusts in that revocable trusts can be cancelled or amended at any time by the grantors. Revocable trusts also do not provide any asset protection because the assets are deemed to be owned by the grantor so that they are available both for the grantor’s benefit during lifetime and upon grantor’s death for payment of debts and expenses of administration. As opposed to a revocable trust, once an irrevocable is established, the grantor has no right to revoke it or otherwise reclaim the assets.
All irrevocable trusts share a number key features, including:
Irrevocable trusts may take numerous forms, including Life Insurance Trusts, Charity Lead Trusts, Qualified Disability Trusts, Special Needs Trusts, Charitable Remainder Trusts, Charitable Lead Trusts, Grantor Retained Income Trusts, and Qualified Personal Residence Trusts. The form that is most suitable to a particular person depends on that person’s individual situation.
Benefits of an Irrevocable Trust in Wisconsin
Creating an irrevocable trust in Wisconsin comes with a host of unique benefits, all tailored to meet the individual needs and circumstances of the grantor in question. Here are just a few of the most prominent advantages of this estate planning tool:
Asset protection: Since an irrevocable trust removes assets from your estate, your creditors cannot access the assets within the trust under almost any circumstance. This makes it an ideal way to protect your beneficiaries, and yourself, against creditors.
Tax benefits: In certain situations, the creation of an irrevocable trust can allow you to avoid certain taxes that would otherwise impact your estate. This is particularly true if you set up a Medicaid asset trust. This allows the assets placed into the trust to be excluded from your estate in determining whether you will qualify for Medicaid benefits.
Estate tax advantages: If your irrevocable trust is certified as a generation skipping trust, you can transfer money directly to your grandchildren without the assets being considered part of your estate. Like above, this can help you avoid certain estate taxes. Thus, a generation skipping trust could hold great value for you if you plan on leaving a sizable inheritance for your grandchildren.
Restricted access: The assets in the irrevocable trust are preserved for the benefit of your loved ones. You will not have to worry about people accessing those assets through legal means.
Wisconsin Irrevocable Trust Laws: What the Law Requires
Under the Wisconsin Trust Code, the creation of an irrevocable trust is fairly straightforward. However, certain formalities must be met to ensure that a Wisconsin irrevocable trust is valid, and that the trust document will be recognized and respected by the courts. Compliance with the Wisconsin Trust Code also ensures that the settlor does not unknowingly violate the law.
Pursuant to Wisconsin Statute 701.04, a trust can be created when three elements exist:
- The trust has a settlor, or trust creator.
- A trustee is designated to administer the trust.
- A definite beneficiary is ascertained.
Alternatively, there are some instances where the settlor can serve as the trustee. In such cases, the trust has an ascertainable beneficiary, or beneficiaries, and the interest is not subject to a power of appointment.
Under Wisconsin Statute 701.07, the essential terms of the trust instrument must be established in one of five ways to be valid under the law:
- To the extent possible, the trust must be established in writing.
- If the trust is created by express declaration, the terms of the trust must be established in writing.
- If the trust is revocable, the terms of the trust must be established in the same way as amended under 701.05, Wis. Stats.
- If the trust is created from the property of a person under a valid will, the terms of the trust must be established as provided under 853.02, Wis. Stats.
- If the trust is created from the property of a person under a legally effective testamentary instrument, the terms of the trust must established in the same way as amended under 854.06, Wis. Stats.
In the event a settlor or other interested party wishes to terminate an irrevocable trust, they must follow the statutory procedures to ensure that that termination is recognized by the courts. Under 701.14(1)(a), Wis. Stats., the trust can be terminated if the beneficiary or beneficiaries do not have a vested right to the income or assets of the trust, or if all of the beneficiaries are competent and agree to the termination. This can be done in one of two ways, either (1) by executing a written declaration of consent to termination of the trust, or (2) filing a written petition with the court to terminate the trust.
Likewise, the court may terminate the trust under 701.14(2), Wis. Stats., if the trust could be revoked by the settlor of the trust, and all of the beneficiaries agree to the trust termination in writing.
Irrevocable Trusts in Wisconsin: Common Purposes
Irrevocable trusts find a multitude of applications in Wisconsin. Some of the most common include: The protection of assets from creditors: One of the reasons individuals utilize irrevocable trusts is to protect their assets from abuse and other creditors. Such uses are especially common in nursing home planning (building a healthy estate and avoiding nursing home costs) and in protecting children from abuse. It is also utilized for asset protection between spouses. Welfare planning: Welfare planning simply refers to the practice of qualifying for welfare. This is typically done by effectively making a person impoverished. An irrevocable trust can be used for welfare planning by creating trusts such that assets are legally no longer part of the assets of a given individual, but still maintain some of the non-specific benefits of ownership. A state may view all or part of the trust as income when the beneficiary has access to the principal. Legacy planning: Legacy planning typically refers to protecting an estate from possible tax liability after death. In Wisconsin, the two most common forms of taxes are the inheritance tax and the estate tax. The Wisconsin estate tax is no longer applicable as of 2009. However, some people still use irrevocable trusts to minimize and avoid any possible liability for federal and state inheritance taxes.
Things to Watch For
While Wisconsin irrevocable trust laws provide significant benefits, there can be drawbacks to the use of these trusts as well.
The primary restriction associated with an irrevocable trust is that it cannot be modified by the person who established it, also known as the grantor (or settlor). While the statutory scheme provides a means for modification, it is limited in scope. A third party must represent the best interests of the grantor. However, if you are not able to effectively communicate with your loved ones, or the division of assets is contentious, the modification process can be more complex than needed.
Once an irrevocable trust is created, the grantor has no direct control over the administration of trust assets. The Trustee under the Wisconsin Uniform Prudent Investor Act has total control over all of the assets of the trust. This acts in a similar manner to a corporation. As the grantor, you lose total control, but you have to then rely on the prudence of your trustee(s) . As long as your trust is administered properly, the loss of control can be a minimal consideration. However, for some, having that control is essential, or at least preferred.
Trustees are fiduciaries and must provide adequate communication, keep records, and provide annual accounting to the beneficiaries. Trustees have the authority to invest the trust property in such a manner as they deem appropriate to accomplish the purpose of the trust. Often, methods of investments include low risk strategies. Investment, as with all planning, can change, so a review may be necessary. The Trustee has to be able to fulfill its fiduciary duty of investment and communication.
Trustees must make distributions to beneficiaries in accordance with the trust agreement. Generally speaking, the trustee should consult with the beneficiaries prior to any distribution, but that is not necessarily a requirement under all trusts. For example, if your distribution is tied to a specific event – such as a child reaching age 30 – there would not be a need to consult with the child prior to distribution.
How to Set up a Wisconsin Irrevocable Trust
Once a decision has been made to create a Wisconsin irrevocable trust, putting your plan into action involves a series of basic steps.
Selecting a Trustee
Before you draft an irrevocable trust, you should choose someone you trust as a trustee. The trustee plays the most active role in administering the trust and managing its assets. Although you can request that your trustee follow your instructions (which the trustee is legally bound to do), once the trust is created, the trustee will have the authority to act without direction or approval of anyone else.
Drafting the Trust Agreement
Since a trust is a contract, the best way to make your trust true to your intentions is to have a lawyer help you draft a trust agreement. The trust agreement names the beneficiaries and stipulates how property is to be held for their benefit. A trust agreement may also contain detailed instructions on how the trustee is to act. While some trusts contain only basic terms, others are much more complex, specifying how trust assets can be used for the benefit of the beneficiaries. In addition, a trust can protect and provide for selected beneficiaries, such as an elderly parent suffering from a serious illness or a minor child with special needs.
Registering the Trust with the State of Wisconsin
Wisconsin law does not require all irrevocable trusts to be registered with the state. However, a newly created trust should be registered with the state if it: The state may allow you to combine registration with Wisconsin Probate Court filings, but some forms of registration may remain separate.
Common Questions About Wisconsin Irrevocable Trusts
As with any area of law or estate planning process, there tend to be a host of questions that arise. Unlike some other types of asset protection tools, irrevocable trusts aren’t covered often in popular fiction. So we’ve compiled a list of frequently asked questions.
What is the difference between a revocable trust and an irrevocable trust? The main difference between these two types of trusts is that irrevocable trusts are permanent, while revocable trusts can be amended or revoked altogether by the person establishing the trust. Because you are permanently transferring ownership of your assets to an irrevocable trust, it is much more complex than simply deciding to make a revocable trust irrevocable.
Do Wisconsin irrevocable trusts pay tax? Like other entities, irrevocable trusts are not subject to federal taxation if they do not generate income or trade or business or otherwise sell assets for gain or loss. However, if the trust generates income or gains or keeps non-income paid investments, the income may be taxable to the trust itself or the individual beneficiaries.
Are all Wisconsin irrevocable trusts permanent? Generally, yes. The terms of an irrevocable trust may allow the trustee to distribute trust property if the interests of the trust beneficiaries will be better served, but the beneficiary has no legal recourse to force the trustee to do so .
When can I revoke an irrevocable trust in Wisconsin? Things may go awry at the time a trust is created, so Wisconsin has created a formal process by which an irrevocable trust can be reformed or terminated. The process is detailed in Wisconsin Statutes 881.41: "(1) General. To the extent a court has jurisdiction over a trust, the court may approve a compromise between the interests of the trustee or current beneficiaries and the interests of the special interest representatives, as defined in s. 851.51 (1) (k). If an agreement to change the terms of a trust is signed by the trustee and an interest representative, it is binding on all parties. A trust may be terminated if the purpose has been fulfilled if all of the beneficiaries consent and if the court determines that continuance of the trust is not necessary to achieve its purpose. (2) Incompetent or disabled beneficiaries. If any beneficiary is incompetent or disabled, no trust created by will may be changed, unless the beneificiary’s interest is represented by a special interest representative or the court determines that the trust should be changed in the beneficiary’s best interests. (3) Trusts created by others. With respect to any other trust, unless consented to by a special interest representative, the court may not approve a compromise or terminate a trust unless: