Irrevocable Trusts 101: Securing Your Financial Future

What is an Irrevocable Trust?

Think of an irrevocable trust as a secure vault. Once you lock your valuable assets inside, they're protected and managed precisely how you want them to be, even if you are deceased. It's like making a solid promise to yourself and your loved ones that what you've worked hard for is safeguarded and will be passed on just the way you want.

Why Would I Use an Irrevocable Trust?

Opting for an irrevocable trust is a powerful step towards taking control of your financial legacy. Here's why:

• Asset Protection: It protects your hard-earned assets from creditors and legal disputes.
• Tax Advantages: It can significantly cut down on the estate taxes your heirs would otherwise have to pay.
• Control Over Asset Distribution: You set the rules on who gets what, when, and how. Ensuring your legacy is carried out the way you want it to be.
• Understanding the Benefits: When you fully grasp these advantages, you begin to see how setting up an irrevocable trust can be so powerful. It truly is a strategic move for anyone serious about managing their wealth efficiently and effectively.

Exploring the Landscape of Trusts

Trusts come in many shapes and sizes, each serving different estate planning needs.

Trusts can be broadly categorized into four main types: Living Trusts, Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts.

Living Trusts are created while the grantor (The creator of the trust) is alive and Testamentary Trusts are created after the grantor is dead. 

Revocable Trust

The most common type of trust allows the creator to access and change the trust documents, make changes, or move assets into and out of the trust during the grantor’s lifetime. This is what 97% of all people should use as the majority of people will want and need the freedom to change their trust over time - at death, Revocable Trust’s becomes Irrevocable so that from that point on, what was written into the trust must be honored by the Trustee.

Another  BIG distinction between Irrevocable Trusts and Revocable Trusts is that Revocable Trusts do not provide any asset or estate tax protection. 

Think of this the type of trust to use if you are still accumulating your wealth - you need flexibility, protection from probate, and a filter for your assets after you pass. 

Irrevocable Trusts 

Irrevocable Trusts can either be a living trust or a testamentary trust. 1-3% of the population, if not less, should consider this option for your financial strategy. (Yes, that means only 3% of you reading this should take action with this strategy; otherwise, consider the revocable strategy mentioned above.) An irrevocable trust is a type of trust in which the grantor (creator) gives up ownership and in most cases “control” of their property by giving it, loaning it, or selling it to the trust. Once in the trust is created, the grantor cannot change it but is instead now managed by the trustee. This can cause real issues in the building phase of life as you lose access to and control over whatever assets you place into the trust.

Even though trust can be narrowed into four categories (Living, testamentary, irrevocable, revocable), there are really only two main ones: irrevocable and revocable. In simplistic terms, there are many subcategories of trusts inside these two categories.

When we say many subcategories, we mean many. The amount of different trusts is indeed a black box. Depending on the source, attorney, state, and county, you will likely get a different answer; anywhere from 30 to over 140+ unique trusts are currently in use. One of the things that add complexity and makes this a moving target is you don't have to be an attorney to build trust, you just have to have all the parts, have it notarized, and managed according to the trust document. In a way, you could say that there are infinite different types of trusts that all have three things in common. There is a Grantor, there is a Trustee, and there is a Beneficiary. The black box of estate planning is very complex and this highlights an excellent reason to work with an expert who is able to speak to your specific needs.

Here at BetterWealth, we specialize in Life insurance and one of the most common trust structures we see is the Irrevocable Life Insurance Trust (ILIT), which meshes seamlessly with life insurance. Another commonly used trust in the estate planning sector is Charitable Trusts, which are designed more for philanthropic goals that may also give tax deductions for funding the trusts. Another common one is Special Needs Trusts, which focus more on caring for vulnerable loved ones without jeopardizing their government aid. 

Even with the complexity and moving pieces, it's important to have a broad understanding of these options to choose the right one for your goals. At BetterWealth, we work with experts in trust creation and management to ensure that your wealth isn't just preserved—it's optimized. If you would like help navigating this landscape and tailoring a solution that maximizes your wealth and secures your financial legacy, we would be more than happy to be that partner for you. 

More to consider: 

The Rockefeller Method 

Some of you may already be familiar with this strategy, which may have led you down the rabbit hole to this page. Others of you may have never heard of it. If that is you, we have tons of YouTube content to help familiarize yourself with this concept. You can watch a video we made on this strategy here.

Long story short, the Rockefellers are one of the wealthiest families in history, and they have been one of the few families to keep generational wealth intact since the 1800s. They have been able to do this specifically with many financial tools but foundational using an irrevocable trust.

Something to be very clear on: This strategy is not used with a revocable trust, even though conceptually, you can take bits and pieces of this strategy and use a revocable trust with it. The Rockefellers fell into the 1-3% of people who should consider an irrevocable trust due to their level of wealth and preservation goals. 

But what they did was genius, which eventually became popularized as the Rockefeller method or, some know, the waterfall method. Simply getting a life insurance policy on every person in the family, and when that person dies, the large death benefit payout goes back to the trust that continues to grow the family nest egg. All at the same time, while individuals are alive, their life insurance policies are building cash value that can be borrowed against and utilized like a line of credit to buy more assets to continue to grow the family's wealth. If the family has the right mindset and trusted team, the strategy is one of the most dynamic wealth-building strategies available. 

Irrevocable Trusts, Life Insurance, and Estate Planning?! 

Many assets and moving pieces? 

You now may have gotten this far and are saying I am someone who likely falls in the 1-3% who should consider an irrevocable trust.

Your net worth is likely in the multi-millions you have many assets such as real estate business, equities etc. and have a future estate tax issue to consider. If that is you, then tying it all together to figure out how to synchronize everything and work together is extremely important. The questions that you should be asking are: how do I optimize my wealth today, pay the least taxes legally, and pass down the most money to the causes and people I care about while protecting the wealth I have built while dead and alive? As you know, irrevocable trusts, life insurance, and assets like real estate are powerful tools on their own, each offering unique benefits for managing and protecting your wealth. However, these assets can work in conjunction with each other. When this is done intentionally and the right way, the positive impact of these tools is taken to a whole new level. 

This is why working with a professional who understands how to synergize these tools can transform a sound financial strategy into a great one, optimizing how you preserve and pass on your wealth. This approach allows you to pass on your wealth efficiently, privately, and with as little tax burden as possible. By aligning these elements correctly, you set the stage for a better life for yourself and future generations.

How Hard Is It to Change an Irrevocable Trust?

This was mentioned above, but this may be one of the most essential characteristics that make this strategy powerful and detrimental if the wrong person uses it. An irrevocable trust is set in stone once it's created - there are certain circumstances when a trust may be “decanted” into another “like” trust and at that time small changes can be made, but this is a unique situation. 

From our experience, one thing is clear: irrevocable trusts can be a powerful tool for safeguarding wealth. The problem is that many people aren't willing to take the time to understand these tools. As a result, they never feel confident about taking action and finding out how financial strategies like these can drastically improve their legacy.

Setting Up an Irrevocable Trust: A Step-by-Step Guide

You might be sitting back now and thinking, "Well, I want a trust. How do I get one?" Establishing an irrevocable trust is a deliberate process that requires thoughtful consideration and precise action. Here is an overview of how to set up an irrevocable trust the right way:

1. Determine the Purpose: Decide what you aim to achieve with the trust. Ask yourself, "What's important to me?" It may be to focus on asset protection, optimize your tax benefits,  provide on going benefits for your loved ones, or a combination of them all.
2. Choose the Trust Assets: Identify which of your assets (real estate, investments, or cash) will be most beneficial to place in the trust.
3. Select the Beneficiaries: Decide who will benefit from the trust—family members, friends, or perhaps charities.
4. Choose a Trustee: Appoint a trustworthy and competent trustee to manage the trust assets; this could be an individual or an institution.
5. Draft the Trust Document: Collaborate with an estate planning attorney to draft the trust agreement, detailing the trust's terms and conditions.
6. Sign the Trust Agreement: Legally execute the document, adhering to state laws that may require notarization or witnesses.
7. Transfer Assets: Formally transfer the assets and “fund” the trust, which may involve re-titling property and brokerage or bank accounts.
8. Manage the Trust: The trustee will manage the trust according to its terms, ensuring your assets are handled precisely as you directed them to be.

The Importance of Expert Guidance

Navigating the waters of irrevocable trusts isn't something to tackle alone. The stakes are high, with significant implications for legal and tax planning. That's why partnering with seasoned professionals who understand these tools is critical. At BetterWealth, our experts don't just ensure compliance—they craft strategies that are as unique as your financial situation, ensuring every piece of your estate plan works together perfectly to secure and enhance your wealth.

Connect With the Right Experts

Understanding how each component of your estate strategy can be beneficial is just the start. Working with experts who can make these elements work together can amplify their effectiveness. Let's craft a powerful plan that secures a better life for you and your heirs.

Take the Next Step

Are you curious about optimizing your financial well-being? Don't let another day pass. Schedule a clarity call with our team today and explore how financial tools like irrevocable trusts and life insurance can fortify your financial future, ensuring peace of mind for you and your loved ones.