What Is a Trust?

If you've heard about trusts but aren't quite sure what they are or how they work, you're not alone. Simply put, a trust is a legal arrangement where one party, the grantor (or trustor), assigns another party, the trustee, to manage assets or property for the benefit of a third party, the beneficiary.

Here are the key components of a trust:

Grantor/Trustor: The individual who establishes the trust.

Trustee: The person or entity responsible for securing, overseeing, and managing the trust assets.

Beneficiary: The individual or individuals who benefit from the trust assets.

Assets/Property: What the trust is funded with.

Trusts are becoming an increasingly popular tool in estate planning because they simplify the transfer of assets across generations. There are various types of trusts, with revocable and irrevocable trusts being the most common. Both types allow you to manage your assets, ensure privacy, and avoid probate court, but they have important differences that can affect your estate planning.

What is a Revocable Trust? A revocable trust, often called a "living trust" or "living revocable trust," is one of the most common types of trusts. While the grantor is alive and mentally capable, this type of trust allows them to maintain control over the assets and property in the trust. The grantor can make changes or even cancel the trust according to their preferences. Additionally, a revocable trust includes instructions on how to distribute or manage assets after the grantor's death.

What is an Irrevocable Trust? As the name suggests, an irrevocable trust is challenging to change or terminate after it has been established. This type of trust is designed to hold and manage assets for the beneficiaries' benefit. Irrevocable trusts can be quite complex and offer various options. Unlike other trusts, the irrevocable trust itself—not the grantor—is considered the owner of the assets. People often choose an irrevocable trust to minimize estate taxes or protect assets from creditors, since the assets within the trust are no longer legally theirs.

Key Differences between Revocable and Irrevocable Trusts:

Flexibility:

Revocable Trust: The grantor can modify or terminate the trust at any time while they are alive and mentally competent.
Irrevocable Trust: Once established, this trust generally cannot be altered or terminated by the grantor.

Control:

Revocable Trust: The grantor retains control over the assets and can change the terms or dissolve the trust entirely.
Irrevocable Trust: The grantor relinquishes control over the assets placed in the trust.

Tax Implications:

Revocable Trust: Income generated by the trust is typically reported on the grantor’s personal tax return.
Irrevocable Trust: This trust is considered a separate tax entity and must file its own tax return, responsible for any income taxes owed.

Estate Taxes:

Revocable Trust: Assets within a revocable trust are included in the grantor's estate for tax purposes.
Irrevocable Trust: Assets in an irrevocable trust are usually excluded from the grantor's estate, potentially reducing estate taxes.

A revocable trust offers flexibility and ease of amendment, saving time and money by avoiding probate court. On the other hand, irrevocable trusts provide benefits such as minimizing estate taxes and protecting assets from creditors. The decision between a revocable or irrevocable trust will depend on your unique goals, needs, and circumstances.

At Decorah Bank, our Trust Services team consists of qualified local professionals ready to help you determine if a trust is right for you.

Trust team: Jason Solar, Christina Bruess, Morgan Fechner, Erick Kephart