What's a Trust?
A trust is simply a contractual agreement between the person or persons who establish the trust, the settlor(s), and the person who benefits from it. Those who benefit from the trust are called beneficiaries. The trust is overseen by a trustee who oversees the day-to-day affairs of the trust. A trustee can be thought of as the trust's manager. Trusts have a long history dating back to the 12th century in Britain and are rooted in contract law. Wyoming's Asset Protection Trust is an example of an Irrevocable Trust.
Irrevocable vs Revocable Trusts
There are, generally speaking, two main types of trusts. They are irrevocable and revocable trusts. A revocable trust can be amended or dissolved at anytime. An irrevocable trust is less easy to amend. To amend an irrevocable trust in Wyoming requires the consent of the beneficiaries. Note, this means that self-settled trusts are relatively easy to amend despite their name. The term irrevocable, meaning it cannot be revoked, often evokes negative connotations which are unfairly earned. Wyoming trust law makes amending a trust relatively easy because our legislature understands an individual's or family's goals can change over time. What you agreed to a decade ago may need adjusting as your situation evolves. Learn more about the difference between irrevocable and revocable trusts here.
Irrevocable Trust Basics
An irrevocable trust is considered its own person in the eyes of the laws. It may hold legal title to property and can pay its own taxes. This separateness is what provides its asset protection and tax benefits. Ultimately, the trust is the owner of its assets, not the person who created the trust nor the beneficiaries. Due to this, the assets cannot be taken to satisfy creditor claims against the trust's creator or beneficiaries. The assets are also considered to be outside your death estate and marital estate. This means the trust can lower your estate taxes and may also act as an alternative to a prenuptial agreement in the event of a divorce.
- Settlor or Grantor: This is the person who creates the trust. They transfer the title of their assets into the trusts name.
- Beneficiaries: This is the person who benefits from the trust. For example, Wyoming's self-settled trust allows you to both create a trust and be a beneficiary which is something not all states allow. In Wyoming, you may name yourself, family, charity, a pet or anyone else to be the beneficiary.
- Trustee: This person or institution oversees the trust and acts on its behalf. In Wyoming, you may have a public trust company, unregulated private trust company, or Wyoming resident act as the trustee.
- Trust Agreement: This is the document which describes the trust, e.g. its intended purpose, beneficiaries, trustee and other pertinent factors. It can be amended with the consent of the beneficiaries.
- Certificate of Trust: This is a short document which lays out the important highlights of a trust. It is what's commonly provided to a bank or other financial institution to show the trust exists, who its trustee is, the EIN, etc.
Your trust can be taxed in one of two ways. A Grantor's Trust acts as a pass-through entity. This means any income earned by the trust flows directly through to the beneficiary's personal income statement. A Non-Grantor's Trust pays its own taxes and files its own tax return. This type of trust can, for example, be used to avoid the recent SALT cap deduction limits. It also provides more privacy since the trust's income won't show on your personal income statement. This designation can be toggled on and off as needed depending upon the tax year. This means you can choose what works best in any given year for your situation by switching back and forth.
If you choose a Non-Grantor's trust, then it's important to remember Wyoming has no personal or corporate income tax. We also have no taxes on gifts, estates, intangibles etc. There will only be the federal taxes due which are generally the same across states. Here, however, Wyoming continues to shine due to a quirk in its tax and trust laws. We allow certain revenues to be treated as preserving capital, subject to a COLA adjustment, rather than as income. This can reduce your tax-rate at the federal level too.
Our trust attorney was formerly a Certified Public Accountant (CPA) and will happily assist you with the intricacies of your tax situation. Please contact us today if you have any questions.
Advantages & Disadvantages
To understand the advantages and disadvantages it is best to compare an irrevocable to a revocable trust. A revocable trust is usually used for privacy, e.g. a land trust, or to avoid probate. Since they can be revoked at anytime there are no asset protection or tax benefits arising from them. They are relatively simply documents and can be purchased inexpensively online.
The disadvantage of an Irrevocable Trust come down to price and difficulty in changing its terms. The trust agreement is more complex and will cost more to establish. They also require the consent of the beneficiaries to change. Plus, changes should only be made by a Wyoming trust attorney who is familiar with the state's laws.
There are some who are concerned about "losing control" of their trust. However, for such situations we strongly recommend establishing a single family private trust company. This arrangement allows you to directly manage the trust and its assets, rather than ceding control to an independent trustee. It also provides the potential for significant cost savings when compared to a public trust company that generally charges 1% of assets under management (AUM) per year.
Most jurisdictions severely limit the length of time a trust may exist. Generally, a trust cannot exist longer than 16 years after the last named beneficiary passes away. This is called a limit on perpetuities. Wyoming's trust law exists on the other end of the spectrum because it allows 1,000 year trusts. Learn more here about Wyoming's Dynasty Trust.
Our Wyoming Trust Attorney
You have a choice when it comes to the attorney drafting your trust. You should not, however, use this as an excuse to save a few dollars by cutting corners. You will be placing many of your most valuable assets in the trust. A poor formed trust will not provide the tax and asset protection benefits when you most need them. We recommend only dealing with attorneys who specialize in estate planning and Wyoming trust law. Out of state practitioners, or jack of all trade attorneys, cannot provide the expertise your situation needs. Our Wyoming Trust Attorney helped write Wyoming's laws and was formerly a CPA.