|Home | Faq | Links | Sitemap | Login | Contact|
|Eco-Nomics >Frugality > Asset Protection|
These days, everyone is trying to get their grubby little paws on everything everyone else earns. Then of course the more money you make or assets and wealth you accumulate, the more of a financial target you become for others who are more than happy to relieve you of as much of it as possible. The more wealth you have, or it appears that you have, the more it appears there is for others to take. But what if you could take all your valuables, and make them almost invisible to others? What if you could retain and pass on what you earn, yet make it appear as though you have nothing to take? Trusts can be used to achieve just that, and much more.
TrustsA trust is an agreement whereby legal title to money and/or assets (i.e., the 'principal' or 'corpus') is transferred from the creator of a trust (i.e., the original owner of money and/or assets to be held in trust, called the 'grantor') to a trustee/s, who has a fiduciary responsibility to manage the trust according to specific instructions from the grantor in trust documents, for the benefit of another/others (i.e., beneficiaries of the trust). Many assets (so long as they are legally owned without prior debts or liens against them) can be held in trust, such as money, real estate, vehicles, life insurance, health insurance, stocks, bonds and notes. A trust usually pays at least 5% of capital assets and/or income from the trust as service payments to the trustee/s for managing the trust. Trust agreements are usually drawn up by a lawyer who specializes in trusts, asset protection and estate planning, and may charge as little as a few hundred dollars, or as much as several thousand. Each trust is different and every state has different laws regarding trusts however, so due diligence is a must.
Trusts PurposesThere are many different types of trusts and purposes for their use. Despite the time and cost involved in setting up a trust, it does seem to be an excellent method of asset protection and estate planning. If structured properly, a trust can also be used in place of a will to avoid probate, to protect and pass on your wealth, to reduce or even eliminate gift and estate taxes. Trusts are also often used for privacy purposes because they are recorded in the name of the trust, rather than in the name of grantors or beneficiaries, and trustees are obligated to the privacy of grantors, so trustees cannot disclose information such as the names of the grantor(s) or beneficiaries of a trust without a court order. This greatly reduces the possibility of losing trust income and/or assets to creditors, liens, lawsuits, judgements, seizures and even legal land theft, because information such as the name of owner or grantor is required for any of these processes to begin. If the name of owners, grantors, trustees and beneficiaries is unknown and unrecorded, it can be very difficult, expensive and time consuming to get the information. Not many are willing to spend the extra time, effort and money necessary to connect trust income or assets to you, establish jurisdiction (and thereby the legal authority to freeze and/or seize trust income or assets), determine the value of trust principal, and whether or not that value is sufficient to pay them back for their time, effort and money. Even if this information is found, a trust is not legally responsible for personal debts of its grantors, trustees or beneficiaries, and the trust is not recorded in the name of grantors or beneficiaries, so trust income and/or assets are generally not considered property of the grantor or beneficiaries, unless it is a grantor trust -- and what you don't legally own cannot legally be taken away from you, for any reason. A trust has little to no effect on income and capital gains taxes however. Anyone receiving income or assets from a trust (except tax exempt trusts, associations or organizations) is held liable for all applicable income and capital gains taxes (at their own rates), including grantors, trustees and beneficiaries.
Common Types of TrustsThe most common kinds of trusts include testamentary, living, revocable, irrevocable, charitable, simple, and complex trusts. A testamentary trust takes effect after death, while a living trust is created during the lifetime of the grantor(s). A revocable trust may be changed during the lifetime of a grantor(s), whereas an irrevocable trust cannot be changed, and is for tax purposes considered a separate entity. Charitable trusts may have non-profit status, be exempt from taxes (such as property, income and/or sales taxes), sell shares, and if irrevocable, may be perpetual (that is, last up to 99 years, and be renewed at the end of each trust term). A simple trust has no charitable beneficiaries and is required to distribute all income from the trust corpus the same year it is earned. Only retained income is taxed to the trust, and since a simple trust is often considered a grantor trust (owned by the grantor), gains and income, including that from dividends and interest, is taxed, but the corpus of a simple trust is not. A complex trust may accumulate income, usually distributes some or all trust income or corpus to a charitable beneficiary(ies), and is entitled to a 642(c) charitable deduction. A trust that is permitted but not required to distribute principal is a complex trust, but only in years when principal is actually distributed. All trusts are complex in their final year, because all of the principal/corpus of the trust must be distributed upon termination.
Grantor TrustsGrantors can also be trustees, or even beneficiaries, but if a grantor retains control over or benefits from a trust (for example, if the grantor is also beneficiary or the trust is revocable), the trust is considered a grantor trust, and the grantor is held liable for all taxes related to it. Grantor trusts are disregarded for tax purposes unless an adverse party such as spendthrift provisions, trustees or other beneficiaries must consent to the exercise of a grantor's benefits from or control over trust income or assets. If spendthrift provisions are included in trust documents, beneficiaries and grantors that benefit from an irrevocable trust are not in control of income or assets transferred to or from the trust (so long as the grantor is not also a trustee). In this case, trust income and assets are not considered property of the grantor, and the trust is not considered a grantor trust. If a trustee attempts to hold property for their own benefit however, any related transfer of trust income or assets to them is usually treated as a void and fraudulent conveyance under most state laws.
Spendthrift ProvisionsA spendthrift provision is often included in an irrevocable trust agreement to prevent beneficiaries from dissolving or disposing of trust income or assets as and when they see fit. This gives full authority and spending decisions to the trustee(s), who is bound by terms and conditions set forth in the trust agreement to spend (or not) as specified. A spendthrift provision can be applied to trustees to prevent them from selling, exchanging, investing or otherwise disposing of trust assets. An irrevocable trust with a spendthrift provision can even be used to remove property from the speculative real estate market, by preventing the future sale, transfer, exchange or disposal of property held in trust to anyone other than those named in trust documents (such as for example, a spouse, future beneficiary children, grandchildren, etc.), preventing use of property held in trust to satisfy debts or as collateral on loans. If this results in reduced real estate market values, it is also likely to result in a corresponding reduction of property taxes, potential future estate and inheritance tax liabilities. Such a method might best be put to use in cases where land is held in a private or community land trust, owned by a charitable organization, or to be kept in the family.
The Simple Dollar
Financial talk for the rest of us
Home | Faq |
Links | Sitemap | Login |
© 2012 Eco-Nomics. All Rights Reserved.